Always Get A W-9 Before Paying Your Vendors!

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.

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

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.

5 Most Common W-9 Form Mistakes

Hi, I’m John Croyle the founder of W9manager. On this video, we’re going to talk about the five most common mistakes made on w-9 forms. I’ve been a CPA for over 20 years now and I’ve seen mistakes on W-9 forms every one of those years. It seems like a simple form at first glance but the W-9 form itself has six pages of instruction with almost 6,000 words.  And behind those condensed instructions on the W-9 form is a massive set of IRS tax code regulations. Helping vendors and independent contractors create a correct and complete W-9 form is one of the reasons that we started W9manager.  So, let’s look at the five most common mistakes made on w-9 forms.

Number Five. The name on line one of the W-9 form is blank.  At times vendors can become confused between the names on line one and line two. They can mistakenly fill in only the business name on line two and leave line one blank.  Line one is the legal name that the business or individual uses on their federal tax return and it is required by the IRS. So, it’s imperative that the name on line one and the taxpayer identification number, typically an EIN or SSN given on the W-9 form match to the IRS’s records. This will ensure that the IRS can apply any 1099 information received to the correct taxpayer account.  If they don’t match the IRS won’t have confidence in the information provided and will send an error notice back to the reporting company. This could lead to a 24% deduction in the vendor’s payments moving forward to satisfy the IRS backup withholding requirements. When using our guided process in W9manager the user is required to complete line one. It is a required field and the user cannot continue to the next section until complete.

Number Four. The W-9 form is not signed. Not all W-9 forms are required to be signed but best practice is to require that all vendors sign their W-9 unless the company understands all the situations in which a signature is required. Vendors often send in W-9s that aren’t signed and it’s easy to miss this when initially received. When using our guided process in W9manager you can require that all W-9s are signed and if a user is not the signer, they can send it to another user to sign.

Number Three. The tax classification is not checked. Another mistake we frequently see is a W-9 form without any tax classification checked. Line three of the form requires that the person completing the form check the appropriate box for the federal tax classification of the entity or person noted on line one. This helps the company making the payment to the vendor determine if the payment is reportable on a 1099 form. Without this information the company will have to assume that a 1099 is required for all reportable payments made to the vendor and they won’t be able to exclude entities like corporations that are often exempt from receiving 1099 forms.

Number Two. A disregarded entity listed on the W-9 form.  One of the most misunderstood concepts of the W-9 form is a disregarded entity and consequently because companies don’t understand this concept using the disregarded entity’s information is one of the biggest mistakes made on W-9 forms.  When the disregarded entity name and TIN is then reported on a 1099 it can lead to the reporting company receiving a large number of CP2100 notices, or error notices, from the IRS. These notices require that the company request a new corrected W-9 form from their vendor or start backup with holding 24% on all future payments to the vendor. A disregarded entity is an entity that the IRS disregards for tax purposes or completely ignores. the IRS looks to the owner of the entity and all the tax liability and reporting flows to the owner of the entity. The best example is an LLC that is owned by one individual, also known as a single member LLC. The IRS disregards the LLC and requires that the individual owner’s information be provided on the W-9 form. for more information on disregarded entities see our blog article “What is a disregarded entity” and it’s linked in the description below. And the number one W-9 mistake – the type of limited liability company is not provided.

The Number One mistake we have seen vendors make on a W-9 form is forgetting to include the type of LLC that they are. This is critical as it determines whether the LLC can be treated like a C or S corporation for 1099 reporting purposes. Most payments made to C or S corporations are not required to be reported to the IRS on a 1099. However, payments made to LLCs that are partnerships or owned by an individual person are often reported. All of the top five mistakes made on W-9 forms can be avoided when creating a W09 form using W9manager. It’s always free to create, save, and send your W-9 form. And W-9 manager is not just another blank PDF form site. We walk users through a guided step-by-step process with contextual help buttons on every question.

Thanks for watching this video!