Hi. I’m John Croyle the founder of W9manager. In today’s video we’ll be talking about the IRS’s annual solicitation requirements and what you need to do to avoid them. The IRS requires that companies obtain a vendor’s TIN or 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 that companies use to obtain a vendor’s TIN number.
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 in the description below for more information.
In addition to backup withholding, the IRS requires companies to 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 number. The solicitation process should be completed and backup withholding should continue until the vendor provides their TIN. If you cannot show that you have followed the annual solicitation requirements the IRS then could assess you penalties for filing an information return with a missing or incorrect TIN number.
The first IRS requirement is the 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 back up 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 form is received. If the payee does not provide a TIN when you initially ask for it you are required to make what’s called the first annual solicitation by December 31st of the year in which the account is opened or the transaction occurred. This is for accounts open before December. For transactions in December the solicitation must be made by January 31st of the following year. This is simply a documented request for the W-9 form.
If the payee does not provide a TIN after the first annual solicitation, you must make what’s called the second annual solicitation by December 31st of the year following the calendar year in which the account was opened or the transaction occurred. A third documented request for the W-9 is what this satisfies. In conclusion, the easiest way to avoid the administrative burden of backup withholding and annual solicitation requirements as well as the risk of penalties if done wrong is to always get a W-9 form before paying vendors. Better yet get a W-9 from your vendors and independent contractors before they even begin to provide any services. In the article we look further at what the annual solicitation requirements are when sending out B-notices. For more W-9/1099 resources like this, check out the W9manager Academy at w9manager.com/academy. Thanks for watching today. I appreciate it.