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”.
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.
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.