Top 5 mistakes made on W-9 forms

I’ve been a CPA for over 20 years now and have seen mistakes on W-9 forms every one of those years.  It seems like a simple form at first glance, but the W-9 form itself has 6 pages of instructions with almost 6,000 words.  Behind those condensed instructions on the W-9 form is a massive set of IRS tax code regulations.  Helping vendors and independent contractors create a correct and complete W-9 form is one of the reasons we started W9manager.

#5 – The name on line 1 of the W-9 form is blank

At times vendors can become confused between the names on line 1 and line 2.  They can mistakenly fill in only the business name on line 2 and leave line 1 blank.  Line 1 is the legal name that the business or individual uses on their federal tax return and is required by the IRS.  It is imperative that the name on Line 1 and the taxpayer identification number (typically an EIN or SSN) given on the W-9 form match to the IRS’s records. This will ensure that the IRS can apply any 1099 information received to the correct taxpayer account.  If they don’t match, the IRS won’t have confidence in the information provided and will send an error notice back to the reporting company.  This could lead to a 24% deduction in the vendor’s payment moving forward to satisfy IRS backup withholding requirements.

When using our guided form in W9manager, the user is required to complete line 1.  It is a required field and the user cannot continue to the next section until complete.

#4 – The W-9 form is not signed

Not all W-9 forms are required to be signed, but the best practice is to require that all vendors sign them unless the company understands all the situations in which a signature is required.  Vendors send in W-9s that aren’t signed and the accounting department at the company receiving the W-9 doesn’t always check for this.

When using our guided process in W9manager, a signature can be required when a W-9 form is sent to your vendor. As an added benefit, one user can complete the W-9 form and then send it to another user to sign.

#3 – The tax classification is not checked

Another mistake we see is a W-9 form without any tax classification checked. Line 3 of the form requires that the person completing the form check the appropriate box for the federal tax classification of the entity or person noted on line 1. This helps the company making the payment to the vendor (the payee) to determine if the payment is reportable on a 1099 form. Without this information, the payee will have to assume a 1099 is required for all reportable payment made to the vendor. They won’t be able to exclude entities that are often exempt from receiving 1099s.

The first step users must do when creating a W-9 form in W9manager is to select their tax classification. They are not able to move to the next step without selecting a valid option.

#2 – Disregarded entity used on line 1 of the W-9 form

One of the most misunderstood concepts of the W-9 form is a disregarded entity. And consequently, because companies don’t understand this concept, listing the disregarded entity on line 1 is one of the biggest mistakes made on W-9 forms. When the disregarded entity name and TIN is then reported on a 1099 it can lead to the reporting company receiving a large number of CP2100 notices from the IRS.  These notices require the company to request a new corrected W-9 form from their vendor or start backup withholding 24% on the vendor’s future payments.

A disregarded entity is an entity that the IRS “disregards” for tax purposes or completely ignores. The IRS looks to the owner of the entity and all the tax liability flows to the owner of the entity. The best example is an LLC that is owned by one individual. The IRS “disregards” the LLC and requires that the individual owner’s information be provided on the W-9 form. For more information on disregarded entities, see our blog article, What is a Disregarded Entity?

When completing a W-9 on W9manager users work through a multistep process to determine if they are a single-member LLC.  If they determine that this is the case, W9manager directs them to use the owner of the LLC on the W-9 form.  This process helps to reduce the number of disregarded entities listed on line 1.

W-9 form mistake #1 – The type of limited liability company is not provided

The number one mistake we have seen vendors make on a W-9 forms is forgetting to include the type of LLC. This is critical as it determines whether the LLC can be treated like a C or S corporation for 1099 reporting purposes. Most payments made to C or S corporations are not required to be reported to the IRS on a 1099.   However, payments made to LLCs that are partnerships or owned by an individual person are often reported.

One of the steps that users are guided through when completing a W-9 on W9manager is to select the type of LLC that they have. We ask them if they have filled out Form 2253 or 8832 with the IRS to be taxed as an S Corp or C Corp. If they select one of these options, we note their LLC tax classification as S or C respectively. If they have not filed either form, we then ask them if they are a single or multi-member LLC.  Multi-member LLCs are treated as a partnership and single-member LLCs are asked to use the owner’s information.

Additional References

For additional help, see the 2019 Form W-9 and instructions.

Use W9manager’s guided process to create your W-9.  It’s always free!

W9manager.comIn conclusion, we feel that all of the top 5 mistakes made on W-9 forms can be avoided when creating a W-9 form using W9manager. Use W9manager’s guided step-by-step process to help create the most correct and complete W-9 form.   It is always free to create and send your W-9 form.  W9manager is not just another blank PDF form site.  Every step of the way has contextual help buttons tailored to your specific circumstance.  The W-9 form is then electronically signed and sent securely sent to the requester.

You can then store your W-9 form centrally using W9manager.  Log into your account later and send it as needed.  If you need to create multiple W-9s for more than one company or individual, W9manager allows you to create multiple companies to manage them separately.  Finally, you can also use your mobile phone to send your W-9 from anywhere, to anyone, at any time.

Create and send your W-9 form with W9manager today!

 

Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

What is the difference between an individual and a sole proprietor?

Definition of a sole proprietor

Sole Proprietor vs Individual

The IRS defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.”  It is the simplest and most common way to start a business.  Completing a Schedule C with your 1040 tax form showing that you have business activity is about the only thing that shows that you are a sole proprietor to the IRS.

You do not have to take any formal action to form a sole proprietorship.  The status comes automatically from your business activity.   In fact, you might already be a sole proprietor and not know it.   Chiropractors, accountants, and freelance designers are all possible examples.  Also note that while a sole proprietor has to be an individual, individuals are not always sole proprietors.  Individuals do not always own a business.

Differences with other business types

Sole members of a domestic limited liability company (LLC) that elect to treat an LLC as a corporation are considered stockholders and are not sole proprietors.  The same holds true for sole owners of a corporation.  Furthermore, members of an LLC with multiple members are also not considered sole proprietors as they are “members” of the LLC.  See the Business Structures section on the IRS.gov website for further information.

Liability concerns for sole proprietors

From a liability perspective, there is no distinction between the individual and the business when operating as a sole proprietor.   If someone sues the business, the individual and all of their assets are at risk.  If the business owes a balance on a loan, the individual is responsible to repay the loan as well.  Because of these risks, it is typically advised to set up a corporation or LLC when starting a business.   A corporation or LLC is a separate legal entity and the debts and liabilities of the business typically do not pass to the owners.  Setting up these entities is relatively cheap and easy.   We recommend using an online service like legalzoom.com.

How to complete a W-9 form as a sole proprietor vs an individual

To complete Form W-9 as a sole proprietor enter your individual name as shown on your 1040/1040A/1040EZ on line 1.  Next, on line 2 you can enter your business, trade, or “doing business as” (DBA) name.  Line 2 is optional but it is helpful to the person requesting Form W-9 to identify your business.  An individual that does not operate a business would leave Line 2 blank.  Fortunately, the distinction between an individual and a sole proprietor is not important when completing line 3.  Individuals and sole proprietors check the same box, “Individual/sole proprietor or single-member LLC.”

When completing the TIN number section, sole proprietors typically use their Social Security Number.  However, we recommend from a security perspective that all sole proprietors use an EIN number in their name.  An EIN number can be used instead of your Social Security number to help reduce the risk of identity theft.  Just be certain that the name on Line 1  matches the TIN number given.  An EIN number can instantly be obtained online through the IRS.gov website. For more information on completing Form W-9 see How to Fill Out a Form W-9.

Use W9manager’s guided process to create your W-9

 

W9manager.com

Looking to make sure your W-9 form is filled out right and follows IRS guidelines when you are required to complete a W-9 form?  Use W9manager’s guided step-by-step process to help create the most correct and complete W-9 form.   It is always free to create and send your W-9 form.  W9manager is not just another blank PDF form site.  Every step of the way has contextual help buttons tailored to your specific circumstance.  The W-9 form is then electronically signed and sent securely sent to the requester.

You can then store your W-9 form centrally using W9manager.  Log into your account later and send it as needed.  If you need to create W-9s forms for more than one company or individual, W9manager allows you to create multiple companies to manage them separately.  Finally, you can also use your mobile phone to send your W-9 from anywhere, to anyone, at any time.

Create and send your W-9 form with W9manager today!  www.w9manager.com.

Disclaimer – Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues.  In addition, this article is not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

 

What is the difference between a Form W-2 and a Form 1099-MISC?

Although both of these forms are called information returns, they serve different functions.

Employers use Form W-2, Wage and Tax Statement, to:

  • Report wages, tips, and other compensation paid to an employee.
  • Report the employee’s income and social security taxes withheld, and other information.
  • Report wage and withholding information to the employee and the Social Security Administration. The Social Security Administration shares the information with the Internal Revenue Service.

Payers use Form 1099-MISC, Miscellaneous Income, to:

  • Report payments made in the course of a trade or business to a person who is not an employee or to an unincorporated business.
  • Report payments of $10 or more in gross royalties or $600 or more in rents or compensation. Report payment information to the IRS and the person or business that received the payment.

Additional Information: