What is a W-9 and what do we do with it?

Before we talk about IRS Form W-9, we need to start with a brief overview of 1099’s.

The IRS requires you to issue a Form-1099-NEC to any independent contractor or vendor you pay more than $600 to in any calendar year. If you pay rent or pay attorneys, you issue Form 1099-MISC. The entity’s tax classification determines whether you need to send them a 1099. More about that later. 

So how do you know how an independent contractor or vendor is taxed? That’s where IRS Form W-9 comes in.

What is Form W-9?

The IRS requires you to obtain a W-9, and it provides your vendors and contractors the means to furnish the information you need (name, address, EIN# or SS#, and tax classification) to file the 1099-NEC or 1099-MISC.  Below is a copy of IRS form W-9.

When should we request a W-9?

Ideally, you require a W-9 from every vendor at the beginning of your business relationship, before you pay them. You’ll avoid a panicky January (when 1099s are due) if you follow this practice. It’s a good idea to send and receive a W-9 as an encrypted email attachment to protect the sensitive information on the form.

The vendor may tell you that they don’t need a 1099 and therefore don’t need to send you a W-9. The onus is on you to prove you complied with the IRS requirements. Always get a W-9. If the vendor is taxed as a C or S corporation, you won’t issue a 1099; however, you will want to have proof, in the form of their W-9, if the IRS asks.

If you send 1099s electronically, you must obtain written authorization from each vendor each year. You can add the authorization to the W-9 you send to the vendor.

What should we do with a W-9?

Review the W-9 for accuracy and completeness.

  • Ensure the name field is complete (line 1).
  • Note the business name (line 2) if entered.
  • Determine vendor 1099 eligibility based on the entity’s tax classification. Entities taxed as an S or C corporation (including LLCs treated as an S or C corporation), government entities, and nonprofit organizations are exempt from receiving a 1099; however, they are not exempt from the requirement to provide you with their form W-9.

Check that the address information is complete (lines 5 and 6).

The most common error we see is in the tax classification section:  Either nothing is checked, or “limited liability company” is checked, but the tax classification for the LLC is not entered. If any information is missing or if the form is illegible, request a new form from the vendor before you issue payment. 

We recommend you attach the W-9 to the vendor record in your accounting system and/or your accounts payable system, and that you mark vendors who have not submitted a W-9 as ineligible for payment.

What if a vendor doesn’t give us their W-9?

It’s best to not pay the vendor until you receive the W-9. The thought of not getting paid can motivate most vendors to send you the form quickly.

If you don’t receive a W-9 and have paid the vendor anyway, you’ll want to be covered. To stay on the IRS’s good side, make sure you send three “solicitations” for the vendor’s W-9. You can use email for the requests. 

  • Email the first request when you establish your business relationship with the vendor.
  • Email the second request (first annual solicitation) by December 31 of the same year you began the business relationship. If you started working with the vendor in December, then send the second request by January 31 of the next year.
  • Email the third request (second annual solicitation) by December 31 of the next year.
IRS penalties

If, after the third request, you still don’t receive the vendor’s W-9, you must start backup-withholding on any payments you make to the vendor and report to the IRS using Form 945—a major headache that you’ll want to avoid.

Key Takeaways:

  • Avoid a January panic, which is no way to start a new year, by requiring a W-9 from any contractor, vendor, attorney, or landlord before you pay them.
  • Make sure you review the W-9 and ask the vendor to resubmit it if it is incomplete, illegible, or unsigned—bonus points for validating the EIN with the IRS.
  • Avoid potential IRS penalties by making sure you have W-9s for all vendors you pay.

Aug 16, 2022