Hi, my name is John Croyle. I’m the founder of W9manager. In today’s video we’re going to talk about the reason to always get a W-9 form 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, text classification, address and exemption and FATCA statuses. This information is then used to process a 1099 form at year end, if required. Getting a W-9 form up front will help you avoid many headaches and streamline your year-end W-9/1099 process.
First, getting a W-9 form helps you avoid IRS backup withholding requirements. 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. You then have to make sure to file form 945 timely at year-end and getting a W-9 up front eliminates the requirements to backup withhold anything, in most cases.
Secondly, getting a W-9 form will help you avoid IRS annual solicitation requirements. Part of the backup withholding process requires that companies show they have 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 form up front will eliminate this requirement. See our video on annual solicitation requirements.
Next, getting a W-9 will help you have less 1099 forms to file. When you deduct money from a vendor or independent contractor due to backup withholding requirements 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 itself.
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. There will be 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, or error notices. When submitting a 1099 form to the IRS without a TIN number or with a TIN number that doesn’t match the legal name of the W-9 you will likely receive a CP2100 notice from the IRS. This is an error notice from the IRS saying that 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.
The next reason I’m going to talk about is that it’s always easier to get a W-9 up front. It’s 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 time 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 to you since they’ve already been paid.
Finally, you will have a reduced risk of penalties. If you wait until the end of the year to get all of your W-9s from your vendors, you run the risk that you can’t get the W-9 form from the vendor at all. The vendor or independent contractor may be out of business or they may just not want to 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 the 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 penalty on $10 million paid to a vendor. The risk here is massive and really not understood by many companies. For more information see our blog on potential IRS penalties.
So, to conclude, 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 payment 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 final payment. For more content like this check out the W9manager Academy at w9manager.com/academy. Thanks for watching our video today. I appreciate it.