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Why do I need to fill out a W-9 form?

Video Transcript

Hi, I’m John Croyle, the founder of W9manager. In today’s video we will be answering the question, “Why do I need to fill out a W-9 form?

The first thing to understand is “Why your customer or client is 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 you and the IRS at the end of each calendar year this is typically done using Form 1099 and 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 you for your Taxpayer Identification Number or TIN. Your unique TIN is the way the IRS identifies you in its records. And a TIN is typically either your personal Social Security Number or an Employer Identification Number or EIN. The IRS compares the payment information reported on Form 1099 to the income that you report on your income tax return. If the income that you report on your tax return does not include all the payments reported on Form 1099s received by the IRS your return could be red-flagged. The IRS could then take steps to determine why all the income earned was not reported and this could result in an audit by the IRS.

So, what is the consequence of not submitting a W-9 form when somebody paying you asked for it? 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 or client to reduce all the payments made to you moving forward by 24% and remit this amount to the IRS on Form 945. 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 of their vendors TIN numbers in advance of making any payment. Getting a W-9 form from everyone that they pay is the standard process that the IRS has created for payers to obtain the TIN number. So even though you are not required technically to give your customer a W-9 it is always in your benefit to complete one. Otherwise, your customer will likely be required to withhold 24% from all payments made to you.