Beware of the IRS’s W-9 annual solicitation requirements

The IRS requires that companies obtain a vendor’s TIN (Taxpayer Identification Number) before making a payment to them. The TIN is normally either a vendor’s Employer Identification Number or Social Security Number. Although using a W-9 form is typically not mandated by the IRS outside of interest, dividend, and broker payments, asking vendors to complete a W-9 form is the standard practice companies use to obtain a vendor’s TIN.

If a vendor refuses or neglects to provide a TIN, the company is required to withhold 24% of all 1099 reportable payments owed to the vendor that are subject to backup withholding rules.  The amounts withheld must then be remitted to the IRS.  Take note that some payments to vendors are not reportable and are not subject to backup withholding or annual solicitation requirements.  See our blog on backup withholding for more information.

In addition to backup withholding, the IRS requires companies comply with annual solicitation requirements if a W-9 form is not received before payment.  A solicitation is a request for a vendor’s correct TIN. The solicitation process should be completed and backup withholding should continue until the vendor provides their TIN. If you cannot show that you followed the annual solicitation requirements the IRS could assess you penalties for filing an information return with a missing or incorrect TIN.

Initial Solicitation – An initial solicitation should be made when a payee first opens an account or when the first payment occurs. A W-9 form is typically used for this request.  If the payee does not provide a TIN when you initially ask for it, you must begin backup withholding.  To avoid the risk of penalties from not obtaining a W-9 form and the significant administrative burden in backup withholding, companies typically ensure payments are not made until a W-9 is received.

First Annual Solicitation – If the payee does not provide a TIN when you initially ask for it, you must make the first annual solicitation by December 31st of the year in which the account is opened, or the transaction occurred. (for accounts opened before December) For transactions in December, the solicitation must be made by January 31st of the following year.

Second Annual Solicitation – If the payee does not provide a TIN after the first annual solicitation, you must make the second annual solicitation by December 31 of the year following the calendar year in which the account was opened or transaction occurred.

Conclusion – To avoid the administrative burden of backup withholding and annual solicitation requirements as well as the risk of penalties if done wrong, always get a W-9 form before paying your vendors!

What are the first and second annual solicitation requirements when sending out “B” notices?

If you file a 1099 form with a missing or incorrect TIN you may receive an error notice from the IRS also referred to as a CP2100 (large volume filers) or CP2100A (small volume filers) notice.  In this notice the IRS may require you to follow additional procedures including sending a “B” notice (backup withholding notice) to your vendor, starting backup withholding, and following annual solicitation requirements.  If these procedures are not followed you may be assessed additional IRS penalties.

CP2100(A) notices for a missing TIN: Begin backup withholding on any reportable payment you make and continue backup withholding until you receive a TIN. Remember that in some cases, the TIN must be certified (a signed W-9 form). In order to avoid a penalty for filing an information return that omitted the payee’s TIN, you must make a first annual solicitation for the TIN (generally by December 31 of the year in which the account is opened) and if a TIN is still not received make a second annual solicitation by December 31 of the following year. No annual solicitations are required in the years in which no reported payments are made.

CP2100(A) notices for an incorrect TIN: You must make up to two annual solicitations in response to the CP2100(A) Notice. You must send a B Notice within 15 business days after you receive a CP2100(A) Notice. If you receive a Proposed Penalty Notice (972CG) but not a CP2100(A) Notice, your annual solicitation must be made by December 31st of the year you received the Proposed Penalty Notice (972CG).

However, if you already sent a B Notice in the calendar year in response to a CP2100(A) Notice, you do not have to send another solicitation in response to the proposed penalty notice. If the IRS notifies you in the next calendar year that a TIN is still incorrect, you must make a second annual solicitation within 15 business days after you receive the second CP2100(A) Notice.

What is the relationship between the requirements to make an annual solicitation for a payee’s TIN and the requirements to send a “B” Notice?

Sending a “B” Notice to a payee in response to a CP2100(A) Notice satisfies the annual solicitation requirement to avoid a penalty for filing an information return with an incorrect TIN.

For additional information see Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s) and Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs.

Always get a W-9 before paying your vendors!

Getting a W-9 form before you make the first payment to a new vendor or independent contractor is critical and will save tremendous time at year-end and reduce potential IRS penalties.   A W-9 form provides you with the vendor’s legal name, TIN number, tax classification, address, and exemption/FATCA status.   This information is then used to process a 1099 form at year-end if required.   Getting W-9s upfront will help you avoid many headaches and streamline your year-end W-9/1099 process.

Avoid backup withholding  – You can avoid the requirements for backup withholding. Backup withholding can be very onerous and time-consuming. The IRS requires companies to withhold 24% of all reportable amounts paid to the vendor and remit the funds collected to them. You then have to follow a very specific deposit schedule outlined by the IRS with potential penalties for missing payment deadlines. See the deposit schedule example at the end of this article. You then have to make sure to file Form 945 timely at year-end.  And getting a W-9 upfront eliminates the requirement to backup withhold anything in most cases. To learn more about backup withholding click here.

No annual solicitation requirement – You can avoid having to set up a process for annual solicitation of the vendor’s W-9 form. Part of the backup withholding process requires the company to show they initially requested the W-9 form upon the first transaction and then at each of the following two calendar year-ends. If the company cannot show that they followed the annual solicitation requirements they may be subject to additional IRS penalties.  Again, getting a W-9 upfront will eliminate this requirement.  .

Less 1099 forms to file – When you deduct money from a vendor or independent contractor due to backup withholding requirement you will always be required to issue a 1099 form.  In many cases, the initial payments made to the vendor or independent contractor are not reportable.  And the only reason you now have to issue a 1099 form is to report the backup withholding.  In addition to the extra work, this also exposes you to the risk of additional penalties and interest due to the increased number of 1099s issued if not done right.

Less “B” notices to work – As you increase the number of 1099s that are issued, you will also increase the likelihood of receiving “B” notices from the IRS. When submitting a 1099 form to the IRS without a TIN number or with a TIN that doesn’t match the legal name on the W-9, you will likely receive a CP2100 or CP2100A notice.  This is an error notice from the IRS saying the 1099 form you submitted was not correct.  This notice will have specific requirements that you will have to follow which likely includes sending out “B” notices to your vendor. This also exposes you to the risk of additional penalties and interest if you don’t get the “B” notice process done right.

Easier to get W-9 upfront – It is much easier and more efficient to get a W-9 form from a vendor when they are eager to get paid than at a later point in the year when they have already been paid. Companies that manage this process well require vendors to submit a W-9 form prior to purchasing any goods or authorizing any services.   Or they require the vendor to submit a W-9 form to them before payment is made.  If you wait until year-end you may not be able to find the vendor or they may be reluctant to provide a W-9 form since they have already been paid.

Reduced risk of penalties – If you wait until the end of the year to get all your W-9s from your vendors you run the risk that you can’t get the W-9 from the vendor at all. The vendor or independent contractor may be out-of-business. Or they may just not respond knowing you can’t report the payments to the IRS without their legal name and TIN number. At this point, you can no longer go back and withhold 24% of all payments to the vendor and follow annual solicitation requirements.   Your company now runs the risk of owing the entire 24% that was not backup withheld as well as significant IRS penalties.  For context that would be a $2.4 million dollar penalty on $10 million dollars paid to a vendor.  The risk here is massive and really not understood by many companies.  For more information on potential IRS penalties click here.

Conclusion

Don’t issue purchase orders or authorize work until a W-9 form is received.  And if you end up receiving a bill from a vendor, don’t make any payments to the vendor until a W-9 is received!  If they are unable or unwilling to provide a W-9, make sure you comply with backup withholding requirements starting with the first payment.

Also, consider the benefits of using W9manager to automate your entire W-9/1099 process from W-9 collection through 1099 filing.  Don’t spend any more of your valuable time on this process and help ensure IRS compliance.  Plans start as low as $69/year and you can try it free for 14 days with no credit card.

Example deposit schedule for backup withholding

Here is an example of the IRS regulations you can avoid by just getting a W-9 timely.

There are two deposit schedules—monthly or semiweekly—for determining when you must deposit withheld federal income tax. These schedules tell you when a deposit is due after a tax liability arises (that is, you make a payment subject to federal income tax withholding, including backup withholding). Before the beginning of each calendar year, you must determine which of the two deposit schedules you must use.

For 2020, you’re a monthly schedule depositor for Form 945 if the total tax reported on your 2018 Form 945 (line 3) was $50,000 or less. If the total tax reported for 2018 was more than $50,000, you’re a semiweekly schedule depositor.

If you’re a monthly schedule depositor and accumulate a $100,000 liability or more on any day during a calendar month, your deposit schedule changes on the next day to semiweekly for the remainder of the year and for the following year. For more information, see the $100,000 Next-Day Deposit Rule in section 11 of Pub. 15.

Automate your entire IRS W-9/1099 compliance  process

Year-end is busy.  Don’t waste time on manual W-9/1099 processing.

W9manager.com

    • 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.

Try W9manager for free for 14 days at W9manager.com.  Plans start at only $69/year!

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.

How to fill out a W-9 form

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.

U.S. person

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

From W-9 Main Section

 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.

W9manager.com

    • 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.

Try W9manager for free for 14 days at W9manager.com.  Plans start at only $69/year!

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.

What is a TIN number?

A Taxpayer Identification Number (TIN) is an identification number used by the Internal Revenue Service (IRS) in the administration of tax laws. It is issued either by the Social Security Administration (SSA) or by the IRS. A Social Security number (SSN) is issued by the SSA whereas all other TINs are issued by the IRS.

Taxpayer Identification Numbers

    • Social Security Number “SSN
    • Employer Identification Number “EIN
    • Individual Taxpayer Identification Number “ITIN
    • Taxpayer Identification Number for Pending U.S. Adoptions “ATIN
    • Preparer Taxpayer Identification Number “PTIN

Do I Need One?

A TIN must be furnished on returns, statements, and other tax related documents. For example a number must be furnished:

    • When filing your tax returns.
    • When claiming treaty benefits.

A TIN must be on a withholding certificate if the beneficial owner is claiming any of the following:

    • Tax treaty benefits (other than for income from marketable securities)
    • Exemption for effectively connected income
    • Exemption for certain annuities

When Claiming Exemptions for Dependent or Spouse:

You generally must list on your individual income tax return the social security number (SSN) of any person for whom you claim an exemption. If your dependent or spouse does not have and is not eligible to get an SSN, you must list the ITIN instead of an SSN. You do not need an SSN or ITIN for a child who was born and died in the same tax year. Instead of an SSN or ITIN, attach a copy of the child’s birth certificate and write Died on the appropriate exemption line of your tax return.

How Do I Get A TIN?

SSN

You will need to complete Form SS-5, Application for a Social Security Card (PDF). You also must submit evidence of your identity, age, and U.S. citizenship or lawful alien status. For more information please see the Social Security Administration website.

Form SS-5 is also available by calling 1-800-772-1213 or visiting your local Social Security office. These services are free.

EIN

An Employer Identification Number (EIN) is also known as a federal tax identification number, and is used to identify a business entity. It is also used by estates and trusts which have income which is required to be reported on Form 1041, U.S. Income Tax Return for Estates and Trusts. Refer to Employer ID Numbers for more information.

The following form is available only to employers located in Puerto Rico, Solicitud de Número de Identificación Patronal (EIN) SS-4PR (PDF).

ITIN

An ITIN, or Individual Taxpayer Identification Number, is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents who cannot get a Social Security Number (SSN). It is a 9-digit number, beginning with the number “9”, formatted like an SSN (NNN-NN-NNNN).

To obtain an ITIN, you must complete IRS Form W-7, IRS Application for Individual Taxpayer Identification Number. The Form W-7 requires documentation substantiating foreign/alien status and true identity for each individual. You may either mail the documentation, along with the Form W-7, to the address shown in the Form W-7 Instructions, present it at IRS walk-in offices, or process your application through an Acceptance Agent authorized by the IRS. Form W-7(SP), Solicitud de Número de Identificación Personal del Contribuyente del Servicio de Impuestos Internos is available for use by Spanish speakers.

Acceptance Agents are entities (colleges, financial institutions, accounting firms, etc.) who are authorized by the IRS to assist applicants in obtaining ITINs. They review the applicant’s documentation and forward the completed Form W-7 to IRS for processing.

NOTE: You cannot claim the earned income credit using an ITIN.

Foreign persons who are individuals should apply for a social security number (SSN, if permitted) on Form SS-5 with the Social Security Administration, or should apply for an Individual Taxpayer Identification Number (ITIN) on Form W-7. Effective immediately, each ITIN applicant must now:

    • Apply using the revised Form W-7, Application for IRS Individual Taxpayer Identification Number; and
    • Attach a federal income tax return to the Form W-7.

Applicants who meet one of the exceptions to the requirement to file a tax return (see the Instructions for Form W-7) must provide documentation to support the exception.

New W-7/ITIN rules were issued on December 17, 2003. For a summary of those rules, please see the new Form W-7 and its instructions.

For more detailed information on ITINs, refer to:

ATIN

An Adoption Taxpayer Identification Number (ATIN) is a temporary nine-digit number issued by the IRS to individuals who are in the process of legally adopting a U.S. citizen or resident child but who cannot get an SSN for that child in time to file their tax return.

Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions is used to apply for an ATIN. (NOTE: Do not use Form W-7A if the child is not a U.S. citizen or resident.)

PTIN

Beginning January 1, 2011, if you are a paid tax preparer you must use a valid Preparer Tax Identification Number (PTIN) on returns you prepare. Use of the PTIN no longer is optional. If you do not have a PTIN, you must get one by using the new IRS sign-up system. Even if you have a PTIN but you received it prior to September 28, 2010, you must apply for a new or renewed PTIN by using the new system. If all your authentication information matches, you may be issued the same number. You must have a PTIN if you, for compensation, prepare all or substantially all of any federal tax return or claim for refund.

If you do not want to apply for a PTIN online, use Form W-12, IRS Paid Preparer Tax Identification Number Application. The paper application will take 4-6 weeks to process.

If you are a foreign preparer who is unable to get a U.S. Social Security Number, please see the instructions on New Requirements for Tax Return Preparers: Frequently Asked Questions.

Foreign Persons and IRS Employer Identification Numbers

Foreign entities that are not individuals (i.e., foreign corporations, etc.) and that are required to have a federal Employer Identification Number (EIN) in order to claim an exemption from withholding because of a tax treaty (claimed on Form W-8BEN), need to submit Form SS-4 Application for Employer Identification Number to the Internal Revenue Service in order to apply for such an EIN. Those foreign entities filing Form SS-4 for the purpose of obtaining an EIN in order to claim a tax treaty exemption and which otherwise have no requirements to file a U.S. income tax return, employment tax return, or excise tax return, should comply with the following special instructions when filling out Form SS-4. When completing line 7b of Form SS-4, the applicant should write “N/A” in the block asking for an SSN or ITIN, unless the applicant already has an SSN or ITIN. When answering question 10 on Form SS-4, the applicant should check the “other” block and write or type in immediately after it one of the following phrases as most appropriate:

“For W-8BEN Purposes Only”
“For Tax Treaty Purposes Only”
“Required under Reg. 1.1441-1(e)(4)(viii)”
“897(i) Election”

If questions 11 through 17 on Form SS-4 do not apply to the applicant because he has no U.S. tax return filing requirement, such questions should be annotated “N/A”. A foreign entity that completes Form SS-4 in the manner described above should be entered into IRS records as not having a filing requirement for any U.S. tax returns. However, if the foreign entity receives a letter from the IRS soliciting the filing of a U.S. tax return, the foreign entity should respond to the letter immediately by stating that it has no requirement to file any U.S. tax returns. Failure to respond to the IRS letter may result in a procedural assessment of tax by the IRS against the foreign entity. If the foreign entity later becomes liable to file a U.S. tax return, the foreign entity should not apply for a new EIN, but should instead use the EIN it was first issued on all U.S. tax returns filed thereafter.

To expedite the issuance of an EIN for a foreign entity, please call (267) 941-1099. This is not a toll-free call.

References/Related Topics

Automate your entire IRS W-9/1099 compliance  process

Year-end is busy.  Don’t waste time on manual W-9/1099 processing.

W9manager.com

    • 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.

Try W9manager for free for 14 days at W9manager.com.  Plans start at only $69/year!

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.

 

Am I required to complete Form W-9?

Why is my customer asking for a W-9 form?

Companies that make payments in the normal course of their business are required to report certain payments to both the IRS and to the person or entity paid at the end of each calendar year.  This is typically done using Form 1099.  The IRS calls this requirement “Information Reporting” and the process is similar to the way that employers report wages paid to employees on Form W-2.

When the payment for a product or service is required to be reported to the IRS on Form 1099, your customer is required to ask for your taxpayer identification number (TIN).  Your unique TIN is the way the IRS identifies you in its records.  A TIN is typically either your personal social security number (SSN) or an employer identification number (EIN).

When the IRS receives the payment information on Form 1099 they compare that information to the income that you reported on your income tax return.  If the income that your report on your tax return does not include all the payments reported on all Form 1099s received by the IRS, your return could be red-flagged.  The IRS could then take steps to determine why all income earned was not reported.

The consequence of not submitting a W-9

If you do not provide your TIN number to your customer when requested, the customer will not be able to specifically report your income on Form 1099.  The IRS will then require your customer to reduce all payments to you by 24% and remit this amount to the IRS on Form 945.   (See our blog article on backup withholding).

The IRS will hold your customer personally responsible for this 24% if they don’t obtain the TIN number or withhold the required amount.  Additional penalties and interest could also be assessed in addition to the 24% in backup withholding.  Therefore, most companies put procedures in place to obtain all their vendor’s TIN numbers in advance of making any payment.  Requesting Form W-9 to be completed is the standard process that the IRS has created for payers to obtain the TIN number.

CONCLUSION:  Vendors are not required to submit a Form W-9, however, the likely result would be a 24% reduction in payments to them by their customers.  This is from the IRS’s backup withholding regulation.  Therefore, when required to complete your W-9 form, it is advised to provide it to your customer. 

Examples of information returns

Examples of information returns that use information from Form W-9 include, but are not limited to, the following:

    • Form 1099-INT (interest earned or paid)
    • Form 1099-DIV (dividends, including those from stocks or mutual funds)
    • Form 1099-MISC (various types of income, prizes, awards, or gross proceeds)
    • Form 1099-B (stock or mutual fund sales and certain other transactions by brokers)
    • Form 1099-S (proceeds from real estate transactions)
    • Form 1099-K (merchant card and third-party network transaction)
    • Form 1098 (home mortgage interest), 1098-E (student loan interest), 1098-T (tuition)
    • Form 1099-C (canceled debt)
    • Form 1099-A (acquisition or abandonment of secured property)

Use Form W-9 only if you are a U.S. person (including a resident alien), to provide your correct TIN.

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

Why go through the hassle and uncertainty of creating and sending a paper 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 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 purpose of Form W-9?

Form W-9 is an IRS created form used by an individual or an entity, like a company, to request the taxpayer identification number (TIN) and other information from parties they have paid.  A TIN number is typically an individual’s social security number or a company’s employer identification number.  The purpose of Form W-9 is to provide the TIN number needed to complete an “information return”. 

Information return

An information return, like Form 1099-MISC, is used to communicate to the IRS reportable payments made to certain parties in the normal course of business.  A common reportable payment is one in excess of $600 paid to an independent contractor.  In this case, the company would ask the independent contractor to complete and return a Form W-9.  Please note Form W-9 should only be used if you are a U.S. person (including a resident alien) or company.

Federal tax classification

Form W-9 also asks for a party’s federal tax classification.  This is helpful to the W-9 requester as certain types of payments made to specific entities do not need to be reported to the IRS on an information return.  In addition, the tax classification can be used along with the exempt payee code to determine that backup withholding is not required.

Backup withholding if Form W-9 is not provided

Another purpose of Form W-9 is to help ensure that full payment is received for goods and services sold.  If Form W-9 is not provided to the individual or entity that requests it, future payments can be subject to having part of the payment withheld (known as backup withholding) and remitted directly to the IRS.  This is similar to the way federal tax is withheld from an employee paycheck.  The current backup withholding rate is 24%.  In most cases, just remitting Form W-9 to the requester eliminates any requirement for backup withholding.

IRS review

The IRS summarizes the total payments reported on information returns and compares the total amount to the income reported on the taxpayer’s income tax return.  If there are discrepancies the IRS may request further information from the taxpayer or initiate an audit.

The following is listed under “Purpose of Form W-9″ in the IRS Form W-9 “General Instructions” section

An individual or entity (Form W-9 requester) who is required to file an information return with the IRS must obtain your correct taxpayer identification number (TIN) which may be your social security number (SSN), individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or employer identification number (EIN), to report on an information return the amount paid to you, or other amount reportable on an information return. Examples of information returns include, but are not limited to, the following:

• Form 1099-INT (interest earned or paid)

• Form 1099-DIV (dividends, including those from stocks or mutual funds)

• Form 1099-MISC (various types of income, prizes, awards, or gross proceeds)

• Form 1099-B (stock or mutual fund sales and certain other transactions by brokers)

• Form 1099-S (proceeds from real estate transactions)

• Form 1099-K (merchant card and third-party network transactions)

• Form 1098 (home mortgage interest), 1098-E (student loan interest) 1098-T (tuition)

• Form 1099-C (canceled debt)

• Form 1099-A (acquisition or abandonment of secured property)

Use Form W-9 only if you are a U.S. person (including a resident alien), to provide your correct TIN. If you do not return Form W-9 to the requester with a TIN, you might be subject to backup withholding.  See Form W-9 and instructions here.

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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.

Do I have to request a W-9 from a corporation?

Summary

The Internal Revenue Code (IRC) states that payments to corporations generally do not have to be reported on an information return like Form 1099-MISC.   See Are payments to corporations reportable on a 1099-MISC form? for a discussion of exceptions.  The IRC goes on to state that you may treat a corporation as an exempt recipient (generally exempt from information reporting or receiving Form 1099-MISC) if one of the following indicators is met to identify the entity as a corporation.

  1. A Form W-9 is received which includes an EIN and a statement from the payee that it is a domestic corporation.
  2. You have on file a domestic corporate resolution or similar document clearly indicating corporate status.
  3. The name of the corporation contains an unambiguous expression of corporate status that is Incorporated, Inc., Corporation, Corp., P.C., (but not Company or Co.) or contains the term insurance company, indemnity company, reinsurance company, or assurance company.

There are two ways in practice that accounting departments comply with these indicators so they are not required to obtain Form W-9.  The first step is to look for Inc. or similar terminology on a company’s website, invoice, contract or other document.  The second step is to go to the Secretary of State’s website, complete a business search for the company name and download the Certificate of Incorporation for companies that are a corporation.  If you can determine that an entity is a corporation from one of these two indicators and has no reportable payments (for example, medical or attorney payments) you do not have to request Form W-9.   Please note that foreign corporations are outside the scope of this discussion.

The Long Answer

Internal Revenue Code section 1.6041-3 details payments for which no return of information is required under section 6041.  Paragraph (p)(1) of this section states that an information return is not required for payments made to “a corporation described in section 1.6049-4(c)(1)(ii).”  See Are payments to corporations reportable on a 1099-MISC form? for a discussion of exceptions.

Section 1.6049-4(c)(1)(ii)(A) listed below states that a payer may treat a corporation as an exempt recipient (who is generally exempt from information reporting) based on a properly completed Form W-9 or one of the indicators described in paragraph (c)(1)(ii)(A).

There are two ways in practice that accounting departments comply with these indicators so they are not required to obtain Form W-9.  The first step is to look for Inc. or similar terminology on a company’s website, invoice, contract or other document.  The second step is to go to the Secretary of State’s website, complete a business search for the company name and download the Certificate of Incorporation for companies that are a corporation.  If you can determine that an entity is a corporation from one of these two indicators and has no reportable payments (for example, medical or attorney payments) you do not have to request Form W-9.   Please note that foreign corporations are outside the scope of this discussion.

IRC Section 1.6049-4(c)(1)(ii)(A)

(ii) Exempt recipient defined. The term exempt recipient means any person described in paragraphs (c)(1)(ii)(A) through (Q) of this section. An exempt recipient is generally exempt from information reporting without filing a certificate claiming exempt status unless the provisions of this paragraph (c)(1)(ii) require a payee to file a certificate.

A payor may, in any case, require a payee that is a U.S. person not otherwise required to file a certificate under this paragraph (c)(1)(ii) to file a certificate in order to qualify as an exempt recipient. See § 31.3406(h)-3(a)(1)(iii) and (c)(2) of this chapter for the certificate that a payee that is a U.S. person must provide when a payor requires the certificate to treat the payee as an exempt recipient under this paragraph (c)(1)(ii). A payor may treat a payee as an exempt recipient based upon a properly completed form as described in § 31.3406(h)-3(e)(2) of this chapter, its actual knowledge that the payee is a person described in this paragraph (c)(1)(ii), or the indicators described in this paragraph (c)(1)(ii).

(A) Corporation. A corporation, as defined in section 7701(a)(3), whether domestic or foreign, is an exempt recipient. In addition, for purposes of this paragraph (c)(1), the term corporation includes a partnership all of whose members are corporations described in this paragraph (c)(1), but only if the partnership files with the payor a certificate stating that each member of the partnership meets one of the requirements of paragraph (c)(1)(ii)(A) (1) through (4) of this section. Absent actual knowledge otherwise, a payor may treat a payee as a corporation (and, therefore, as an exempt recipient) if one of the requirements of paragraph (c)(1)(ii)(A) (1), (2), (3), or (4), of this section are met before a payment is made.

(1) The name of the payee contains an unambiguous expression of corporate status that is Incorporated, Inc., Corporation, Corp., P.C., (but not Company or Co.) or contains the term insurance company, indemnity company, reinsurance company, or assurance company, or its name indicates that it is an entity listed as a per se corporation under § 301.7701-2(b)(8)(i) of this chapter.

(2) The payor has on file a corporate resolution or similar document clearly indicating corporate status. For this purpose, a similar document includes a copy of Form 8832, filed by the entity to elect classification as an association under § 301.7701-3(b) of this chapter.

(3) The payor receives a Form W-9 which includes an EIN and a statement from the payee that it is a domestic corporation.

(4) The payor receives a withholding certificate described in § 1.1441-1(e)(2)(i), that includes a certification that the person whose name is on the certificate is a foreign corporation.

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 a disregarded entity?

Here is the IRS definition of a disregarded entity from the “Specific Instructions” section of Form W-9:

Disregarded entity. For U.S. federal tax purposes, an entity that is disregarded as an entity separate from its owner is treated as a “disregarded entity.”  See Regulations section 301.7701-2(c)(2)(iii). Enter the owner’s name on line 1. The name of the entity entered on line 1 should never be a disregarded entity. The name on line 1 should be the name shown on the income tax return on which the income should be reported. For example, if a foreign LLC that is treated as a disregarded entity for U.S. federal tax purposes has a single owner that is a U.S. person, the U.S. owner’s name is required to be provided on line 1. If the direct owner of the entity is also a disregarded entity, enter the first owner that is not disregarded for federal tax purposes. Enter the disregarded entity’s name on line 2, “Business name/disregarded entity name.” If the owner of the disregarded entity is a foreign person, the owner must complete an appropriate Form W-8 instead of a Form W-9.  This is the case even if the foreign person has a U.S. TIN.

This definition has significance for LLCs that only have one owner/member.  These entities are referred to as “single member LLCs” because they only have one member.  They are also considered a “disregarded entity” because the IRS looks past the LLC to the one owner/member for federal tax purposes.   Due to this the IRS requires the LLC to check the box “Individual/sole proprietor or single-member LLC” on the W-9. The name on line 1 should be the single owner/member’s name and NOT the LLC’s name.  The LLC’s name would go on line 2.  The TIN number used in Part I should be the SSN or EIN number of the single member and not the LLC.

One last thing to note, if the owner of a single member LLC is another single member LLC, the IRS looks past the second owner (or more) until it gets to an individual or entity that is not disregarded for tax purposes.