What is a W-9 form and why is my customer asking for it!
So one of your customers has asked you to complete a W-9 form before they can pay you. Why do they need this form that asks for your tax classification and tax ID number! The short answer is – the IRS. The IRS requires companies to add up all the “reportable” payments made to vendors and independent contractors during the calendar year and report these payments to the IRS. This requirement is similar to the way that companies have to report all wages paid to employees.
These payments are typically reported to the IRS on Form 1096 and to the vendor or independent contractor on Form 1099. The combination of your tax classification (for example – individual, corporation or LLC) and the type of payment made (for example – payments for services, attorneys fees or rent) determines what must be reported to the IRS. Payments for “services” to “individuals” are reportable. However, most payments to “corporations” for “services” are not reportable. Your social security number or employer identification number is needed to specifically identify you to the IRS.
The whole process of this reporting is called “information reporting.” In essence, the IRS is requiring companies to track and then “report” payment “information” that would typically be considered income on your income tax return. What does the IRS do with this information? They compare the income reported on the vendor or independent contractor’s income tax return against all the income reported on the 1099 and W-2 forms. If the income reported on the tax return is less than the sum of income reported on the 1099 and W-2 forms the tax return could be flagged to review for under-reported income and consequently underpaid taxes.
Stop using your Social Security Number!
If you work as an independent contractor or sole proprietor you can use an Employer Identification Number (EIN) on your W-9 form and avoid using your Social Security number (SSN). Apply for an instant EIN number for free at irs.gov. Online hours for the IRS EIN service are Monday – Friday, 7am to 10pm EST. Note that independent contractors are considered sole proprietors by the IRS and eligible for an EIN number. It is also not necessary to have employees to obtain an EIN.
The W-9 form should only be completed by what the IRS calls a “U.S. person”. Some examples of U.S. persons include an individual who is a U.S. citizen or a U.S. resident alien. Partnerships, corporations, companies, or associations created or organized in the United States or under the laws of the United States are also U.S. persons.
If you are not a U.S. person you should not use this form. You will likely need to provide Form W-8.
To get started, download the latest W-9 form from the IRS website. Check the date in the top left corner of the form as it is updated occasionally by the IRS. The current revision should read “Rev. October 2018″. Click anywhere on the form and a menu appears at the top that will allow you to either print or save the document. If the browser you are using doesn’t allow you to type directly into the W-9 form then save the form to your desktop and reopen using Adobe Acrobat Reader.
How to fill out your W-9 form
Line 1 – Name: This line should match the name on your income tax return. This the legal name of your as an individual or as a company.
Line 2 – Business name: This line is optional and would include your business name, trade name, DBA name, or disregarded entity name if you have any of these. You only need to complete this line if your name here is different from the name on line 1. The purpose of line 2 is to help identify your company to your customer if the name on Line 1 is not one commonly known by your customer. See our related blog, What is a disregarded entity?
Line 3 – Federal tax classification: Check ONE box for your U.S. federal tax classification. This should be the tax classification of the person or entity name that is entered on line 1. See our related blog, What is the difference between an individual and a sole proprietor?
Limited Liability Company (LLC). If the name on line 1 is an LLC treated as a partnership for U.S. federal tax purposes, check the “Limited liability company” box and enter “P” in the space provided. If the LLC has filed Form 8832 check the “Limited liability company” box and in the space provided enter “C” for C corporation. If the LLC has filed Form 2553 to be taxed as an S corporation, check the “Limited liability company” box and in the space provided enter “S” for S corporation. If the LLC is a single-member LLC (a disregarded entity), do not check the “Limited liability company” box; instead select the tax classification of the owner of the LLC. If the owner of the LLC is another single-member LLC select the first owner that is not a single-member LLC. See our related blog, What tax classification should an LLC select?
Other (see instructions) – This line should be used for classifications that are not listed such as nonprofits, governmental entities, etc.
Line 4 – Exemptions: If you are exempt from backup withholding enter your exempt payee code in the first space. If you are exempt from FATCA reporting enter your exemption from FATCA reporting code in the second space. Generally, individuals (including sole proprietors) are not exempt from backup withholding. See the “Specific Instructions” for line 4 shown with the W-9 form for more detailed information on exemptions.
Line 5 – Address: Enter your address (number, street, and apartment or suite number). This is where the requester of the W-9 form will mail your information returns to.
Line 6 – City, state and ZIP: Enter your city, state and ZIP code.
Line 7 – Account numbers: This is an optional field to list your account number(s) with the company requesting your W-9 such as a bank, brokerage or vendor. We recommend that you do not list any account numbers as you may have to provide additional W-9 forms for accounts you do not include.
Requester’s name and address: This is an optional section you can use to record the requester’s name and address you sent your W-9 to.
Third Step – Enter your TIN number
Part I – Taxpayer Identification Number (TIN): Enter in your taxpayer identification number here. This is typically a social security number for an individual or sole proprietor and an employer identification number for a company. See our blog, What is a TIN number?
Forth Step – Sign your W-9 Form
Part II – Certification: Sign and date your form.
Automate your entire IRS W-9/1099 compliance process
Year-end is busy. Don’t waste time on manual W-9/1099 processing.
- Sync your vendors – Use our .csv import or directly integrate with QuickBooks and Xero. (Oct 2020)
- Request electronic or PDF W-9s – Vendors can respond by either uploading a PDF W-9 or creating an electronic W-9.
- Automatic reminders – Four automatic W-9 request reminders are sent out over two weeks.
- Track W-9 status – Always know the W-9 status for your vendors in an instant.
- Determine 1099 reportablity – Let W9manager tell you if vendor payments have to be reported on a 1099-MISC/NEC form.
- File 1099s with the IRS – Easily export your reportable vendors directly to our partner, Tax2efile.
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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. This article is also not a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.