Employees hired by companies are accustomed to completing various paperwork, including key tax documents that ensure proper deductions for social security, worker’s compensation, insurance, and retirement benefits. But what about independent contractors, sole proprietorships, and other vendors?
As of March 2024, the latest data from the US Bureau of Labor Statistics indicates that there are 10.18 million self-employed individuals in the United States. Just as new hires undergo an application, interview, and hiring process, vendors are selected and vetted to meet business needs. However, unlike new hires, vendors are often not asked to submit essential tax documentation before their initial payment, despite the legal necessity. This article will discuss the vendor tax form, its importance, and the best time to request it.
What is Form W-9?
Form W-9 is an IRS document that vendors provide, including their taxpayer identification number (TIN) and contact information, to the businesses that pay them. Businesses use the signed W-9 forms to prepare information returns, such as Form 1099-MISC and 1099-NEC, which report amounts of at least $600 paid to certain vendors during the calendar year. These forms also address backup withholding and FATCA status.
What Type of Taxpayer Identification Number is Needed for Form W-9?
The payee’s taxpayer identification number (TIN) for Form W-9 can be one of the following:
- Social Security Number (SSN):
- Used by individual sole proprietors, freelancers, or other independent contractors.
- Individual Taxpayer Identification Number (ITIN):
- Used by individuals who cannot obtain a Social Security number.
- Applicable for individual sole proprietors like independent contractors and resident aliens filling out Form W-9.
- Employer Identification Number (EIN):
- Also known as a federal tax identification number.
- Used to identify a business entity and issued by the Internal Revenue Service (IRS).
These identifiers help ensure proper tax reporting and compliance for different types of payees.
How To Request w 9 From Vendor
Some vendors may hesitate to fill out a W-9 form. Here’s how to handle such situations effectively:
- Send a copy of form W-9 to the vendor. Make it convenient for the vendor to request a W-9 form by sending them a copy via email or physical mail. If sending the form digitally, ensure you encrypt the document so that only authorized individuals can access it.
- Explain the reasons for w-9 requirements for vendors. Understandably, a contractor might be cautious about sending sensitive information, such as their Social Security number (SSN), to someone they don’t know well. To alleviate these concerns, explain why you need the form and how you will use and store the information. Be transparent and mention that you need the W-9 to fulfill potential Form 1099 filing requirements as part of your business relationship. Additionally, reassure them about your secure document management system, which restricts access to key employees only.
- Refuse to sign contracts without a W-9. If a vendor refuses to provide a W-9, it’s within your rights to choose not to work with them. It’s advisable to avoid engaging with any person or entity that cannot furnish a W-9 when you have reasonable grounds to request one.
By following these steps, you can address any reluctance from vendors and ensure you collect the necessary documentation for legal and tax compliance.
Do I Need To Get a W9 From All Vendors?
Yes, businesses should request a W-9 from all vendors. Even vendors exempt from backup withholding are required to complete Form W-9 to provide an exempt payee code and make specific certifications. Additionally, some vendors, such as foreign persons, will fill out forms like Form W-8 or similar documentation instead.
Why do Companies Need a W9 From Vendors?
Before hiring an individual or company to deliver services for your business, it’s essential to request a Form W-9. The details provided on a completed W-9 are used to decide if payments to the vendor will require the filing of a 1099 form.
The primary reason to file a 1099 form is for payments made to independent contractors and service providers, including freelancers, consultants, attorneys, and accountants. Additionally, other payments like rent to non-corporate landlords and royalties also necessitate a 1099. For a full list of situations requiring a 1099, consult this IRS page.
There are various types of 1099 forms, the most prominent being the 1099-NEC and 1099-MISC. The 1099-NEC is designated for non-employee compensation, such as payments to contractors, whereas the 1099-MISC is used for rental and royalty payments.
It’s advisable to request a W-9 form from vendors at the start of your relationship, even if you don’t expect to pay them $600 or more throughout the year. This proactive measure ensures you have the necessary documentation ready by January when it’s time to complete and file your 1099 forms.
When Don’t I Need to Request a W-9?
Although it’s typically a good practice to request a W-9 from any non-employee providing services, there are situations where it’s unnecessary. You don’t need to collect W-9 forms from companies if there’s no chance you will need to file a 1099.
For instance, you don’t need to file 1099s for payments made to businesses taxed as C corporations or S corporations, except in specific cases like payments to attorneys and other particular situations. Since LLCs can be taxed in different ways, it’s important to know their tax status when filing 1099s. Additionally, payments to tax-exempt organizations and banks do not require 1099 filings.
Likewise, you don’t need to request a W-9 from publicly traded companies, as they are corporations with publicly accessible EINs.
W-9 forms are not required for:
- Employee reimbursements
- Telephone services
- Freight
- Storage
Conclusion
The w9 requirement for vendors is an essential best practice for any business engaged in contracting services. This proactive step ensures that you have the necessary details for accurate tax reporting, compliance, and smooth financial transactions. By understanding when and how to request a W-9, you can protect your business from potential legal issues and streamline your accounting processes.
Whether dealing with independent contractors, freelancers, or larger business entities, obtaining a W-9 form helps make the end-of-year 1099 filings straightforward and hassle-free. Always be transparent with your vendors about why you need this form and reassure them about your practices for handling sensitive information securely.
