Want to know what impresses accountants? Vendors who send their Forms W-9 before they’re asked. Also, calculators with color screens.
What are W-9s and why do I need them?
Form W-9 gathers the necessary information about a vendor for a business to prepare contractor tax forms at the beginning of each year.
When your business hires an independent contractor or another company to provide a service, it’s best practice to have them fill out a Form W-9. It collects the vendor’s name, address, business type, and taxpayer identification number (TIN), and it certifies an individual’s or entity’s legal eligibility to work.
At the beginning of every year, businesses issue 1099 tax forms to third parties who were paid $600 or more for rendering services in the previous year. In some cases, the threshold is even less. You need the information from a vendor’s W-9 to fill out their 1099.
If you hire a painter to design a mural in your office, you’ll ask them to fill out a Form W-9 before starting the job. The following January, you’ll send the painter, their state tax authority, and the IRS a Form 1099-NEC reflecting the payment. The painter will then use the 1099 when filing their independent contractor taxes.
Form W-9 also reveals a vendor’s run-ins with the IRS that would require you to withhold a portion of the payment for taxes. Unless you’re told otherwise through a W-9 or an IRS letter, non-employee workers are fully responsible for paying their taxes.
When do I need to ask for a W-9?
Before you start contracting with a person or company to provide services to your business, ask them for a Form W-9. The information on a completed W-9 reveals whether paying them triggers a 1099 filing.
The most common reason to file a 1099 is for payments to independent contractors and businesses that provide services, including freelancers, consultants, attorneys, and accountants. Other fees, like rent paid to non-corporate landlords and royalty payments, also require a 1099. Check outfor a complete list.
There are several types of 1099 forms, most prominently 1099-NEC and 1099-MISC. 1099-NEC is for non-employee compensation, like payments to contractors. Rental and royalty payments warrant the 1099-MISC.
It’s best practice to start every vendor relationship by asking for a W-9, even if you don’t expect to pay that person or company $600 or more during the year. You don’t want to find yourself in January without all the documentation you need to complete and file your 1099s.
When don’t I need to ask for a W-9?
Your reflex should be to ask for a W-9 from any non-employee whom you’re paying for services. However, you don’t need to collect a W-9 from companies when there’s no chance you’ll need to file a 1099.
For example, you don’t need to file 1099s for payments to businesses taxed as C corporations or S corporations, except for attorney payments and. Since LLCs may be taxed in one of several ways, you need to pay close attention to how they’re taxed when filing 1099s. Payments to tax-exempt organizations and banks don’t warrant 1099s either.
By this logic, you don’t need to ask for a W-9 from a publicly-traded company since they’re all corporations, with public EINs to boot.
You also don’t need a W-9 before buying merchandise in most cases. However, you need a W-9 before spending $5,000 or more for consumer products that you plan to resell outside of a “permanent retail establishment,” like from your home. It’s best to consult with an accountant if you suspect your business activity roughly fits this description.
W-9s aren’t required when paying for:
- Reimbursements to employees
- Telephone services
Tips for getting W-9s from vendors
Some vendors might be reticent to fill out a W-9. Here’s what to do when you need a W-9 from a new contractor or business.
1. Send a copy of Form W-9 to the vendor
Make it easy to fill out and return the Form W-9 by sending your vendor a copy to their email or physical inbox.
You can downloadfrom the IRS website. The agency occasionally updates the form, so make sure you have the most recent version. If you’re sending a W-9 digitally, encrypt the document so only the rightful users can view it.
2. Explain why you’re asking for a W-9
It’s reasonable for a contractor to be tentative about sending a W-9 to you if you’re a stranger. You’re asking for sensitive information, such as a Social Security number (SSN), so it helps to share with them why you need it and how you will store and use it.
Be transparent when asking for a completed W-9. Explain that you suspect a business relationship with the vendor might result in a required Form 1099 filing, at which point you’ll need the information on the W-9. Mention your secure document management system that allows only key employees access to personnel files.
3. Refuse to sign contracts without a W-9
If a potential vendor refuses to send you a W-9, it’s within your rights not to work with that vendor. I’d recommend avoiding any person or entity who can’t furnish a W-9 when you have reasonable grounds to ask for one.
Many companies have instituted policies that require a completed Form W-9 from every third party before starting work.
Let’s get in form-ation
Making Form W-9 part of your contractor onboarding prevents a frenzy in January to track down people you engaged for services last year.
Once you receive a completed W-9, store it in your accounting software under the vendor’s profile.
View more information: https://www.fool.com/the-blueprint/3-tips-to-get-w-9s-from-vendors/