Do you have questions about Form W-9 and its role in the 1099 tax compliance lifecycle? You are not alone.
While many of us provide or collect W-9 information often, we might now always understand the ‘why’ behind our actions. This FAQ is designed to help you understand not only what requirements apply, but why you should care.
A W-9 is a form used in the United States by businesses and individuals to request taxpayer identification information from individuals, independent contractors, freelancers, and entities (commonly referred to as “Payees”) that they plan to make payments to. The primary purpose of Form W-9 is to collect the recipient's taxpayer identification number (TIN) for reporting purposes.
The most common situation where a W-9 form is used is when a person or business is hiring a freelancer or an independent contractor to provide services. By obtaining the information on the W-9 form, the payer can accurately report the payments made to the IRS and to the payee for tax purposes.
A W-9 form is required for all business or trade related payments that sum to $600 or more each calendar year.
Name and Business Name: The legal name of the payee -- the individual or the name of the business that is providing the services to the payor.
Business Type: Classification of the payee (individual, sole proprietor, corporation, partnership, etc)
Taxpayer Identification Number (TIN): Typically a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) for individuals, or Employer Identification Number (EIN) for businesses
Address: The mailing address associated with the payee.
Certification: The payee certifies, under penalty of perjury, that the information provided is accurate and that they are not subject to backup withholding.
The W-9 form requester uses the information provided to prepare relevant 1099 forms at the end of the tax year (when minimum earnings thresholds were achieved). Any relevant 1099 forms are sent to the recipient, the IRS and the state (where applicable), detailing the total payments made to the individual or business throughout the year.
Many businesses choose to trust the data provided by their payees on W-9 forms. This can create the potential for misfilings that result in corrections (and the related penalties). Verification of W-9 information can be achieved by submitting TIN verifications at the time of W-9 information capture. Reach out to firstname.lastname@example.org if you’d like to learn more about automatic TIN verification.
Businesses may choose to collect W-9 information via the traditional W-9 form exchange or through automated drop-ins that allow for W-9 information capture in the registration or onboarding process. Both processes are legitimate, but automated capture may increase data organization, accuracy, and efficiency.
While collecting and processing W-9 forms is relatively straightforward, there are a few aspects that require careful attention:
Accuracy of Information: Ensuring that the information provided on the W-9 form is accurate is crucial. Mistakes in names, TINs, or addresses can lead to incorrect tax reporting and potential penalties. Businesses should encourage recipients to double-check the information they provide.
TIN Validation: Businesses are advised to validate the TIN provided on the W-9 form with the IRS before filing tax documents. This can be achieved through the IRS TIN matching system, directly, or through a TIN verification automation API.
Information Changes: If a recipient's information changes (such as legal name, address, or TIN), it's important to update the records and request a new W-9 form. Outdated or incorrect information can lead to reporting discrepancies.
Extensive Payee Base: Businesses that frequently work with a large number of contractors or freelancers may find it challenging to manage and keep track of all the W-9 forms they collect. Having an organized system for storing and accessing these forms is important.
Storage and Security: W-9 forms contain sensitive taxpayer information. Businesses have a responsibility to securely store and handle this information to prevent data breaches or unauthorized access.
Changing Tax Laws & Regulations: Tax laws and regulations can change, and this might impact the way W-9 forms are collected and processed. Businesses should stay informed about any updates to reporting requirements.
Backup Withholding: If the Payee fails to provide a valid TIN or if there are errors in the information provided, the business may need to withhold a portion of the payments as backup withholding and report it to the IRS.
Abound offers a one-sized-fits-all-techstacks API that allows companies to easily add features such as W-9 collection through a drop-in component in a matter of hours. Not only that, but with the Abound’s commitment to security and a comprehensive suite of solutions, you can implement a W-9 drop-in, automate TIN verification and submit error-free 1099s during tax season without the headache of manual entry or typos.