Vendors aren’t always asked to provide important tax documents prior to their first payment, despite the fact that this information is required by law. Below, we’ll cover what a W-9 form is, why it’s important, and when you should request it from your vendors.
Employees that have been hired by companies are familiar with the pile of paperwork they fill out, including important tax documents that ensure that the business is deducting appropriate amounts for social security, workman’s comp, insurance, retirement benefits etc. But what about independent contractors, sole proprietorships, and other vendors?
According to a 2019 report by Gallup, 28% of the workforce report being self-employed with 57% of non-farm sole proprietors working in fields that include professional services and administrative roles. Much like how a new hire goes through an application, interview, and hire process, vendors are also chosen and vetted to best fit the business needs. But unlike new hires, vendors aren’t always asked to provide important tax documents prior to first payment despite the fact that this information is required by law. Below, we’ll cover what a W-9 form is, why it’s important, and when you should request it from your vendors.
When money is exchanged between two entities, taxes likely apply. When a business pays an employee, they deduct taxes on behalf of the employee who then files documentation to the Internal Revenue Service (IRS) at the end of the year to prove that taxes have been paid. When money exchanges between a business and a vendor, it is up to the vendor to pay taxes owed to the government. The W-9 is a simple form that requires:
Name of Person or Name of Business. This is the title under which the person performs their service or labor. It may simply be the legal name of the person or a more formal business name or trade name (DBA name). That distinction is dependent on whether or not a business license is in place. The need for a business license will vary from region to region but is likely determined by level of liability and amount of annual earnings.
Tax Identification Number (TIN): For each person or entity filing a tax return, there is a specific, unique number they should use so that the IRS can identify them. These include: Social Security Number, Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), Taxpayer Identification Number for Pending U.S. Adoptions (ATIN), Preparer Taxpayer Identification Number (PTIN). Providing the correct taxpayer identification number on this form is absolutely critical. When a vendor is working under their legal name, a social security number is provided on the W-9. Registered businesses, however, are assigned identifying numbers. For example, in Washington State, registered businesses are given a Universal Business Identifier (UBI). The basic format of the number is 9 digits long. However, it can be written in a 16 digit format, the additional 7 seven digits refer to Business ID and Business Location. These additional numbers are most relevant to businesses that have multiple locations.
Business Type or Federal Tax Classification. Each type of business is subject to different taxes. These classifications are: individual, sole proprietorship, single-member LLC, C Corporation, S Corporation, Partnership, Limited Liability Company (LLC), and Trust/Estate.
Business Contact Information. A mailing address is provided where a business can send form 1099-MISC or 1099-NEC at the end of the tax year.
Any exemptions that apply. Some businesses or payments made are not subject to taxes. These exemptions have a code associated with them that should be filled out on the form. A business should assume that the exemptions are valid except where intimate knowledge of it being otherwise. Nonprofit organizations are an example of a tax-exempt vendor. Further, any businesses that are exempt from Foreign Account Tax Compliance Act (FATCA) withholding are able to provide an exempt payee code as well.
Businesses are required to provide a 1099-MISC or 1099-NEC (as of 2020) to any vendor who receives payments totaling $600 or more over the course of the year for services whether or not a vendor has been asked for or provided a W-9 form. Year-end earnings are reported in this way, filed with IRS as well as sent to the vendor. The W-9 form aids in determining identifying information for a vendor and it is therefore best practice to request a W-9 from all vendors.
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For example, most payments for products or goods are not subject to this requirement, unless over $5,000, as well as some payments made to C or S Corporations. The W-9 form requires the vendor to identify which type of business they are, eliminating any guessing games.
The best time to ask for a completed W-9 Form is while on-boarding a new vendor. Vendors that are operating legally will have no problem providing this information. If a vendor provides any pushback to the request, or fails to provide complete and accurate information, it can be a red flag. Knowing this early on in the relationship can eliminate penalties down the road.
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For example, penalties up to $270 may apply for each 1099 form that includes an incorrect TIN. Having that information available ahead of time means that the number and business name can be vetted for accuracy before running into potential delays and further penalties during tax season.
Because the W-9 form is a helpful tool that does not need to be filed with the IRS, businesses do have the flexibility of collecting this information while not using the form itself. W-9 forms are free to download from the IRS.gov website and sending the form with a request through email is a perfectly okay option. However, businesses do have the option of collecting the information through alternative formats. As long as the business name and type, tax identifier, and certification of information is collected, the means of doing so are up to the discretion of each business.
While scanning and attaching these forms through email is an option for getting a completed form, the forms do contain sensitive information and email may not be the most secure. Especially for vendors who are operating as sole proprietors who use their social security number, giving out that information can feel very uncomfortable. Businesses may also find pushback from vendors that are either new to operating as independent contractors or those that are not filing taxes properly. Not only would that vendor be subject to penalties of perjury, this can be detrimental to a business if they work with a vendor who is not filing taxes. Should this situation occur, businesses are required to withhold 24% of payment, called backup withholding, to be filed to the IRS to help them identify non-compliant businesses.
Routable offers software that supports healthy business-to-business relationships. While obtaining W-9 information is just one step in having a successful vendor management plan, the consequences of not having this W-9 information are far reaching. To help ensure that W-9 forms are collected as soon as possible, Routable software creates the opportunity to collect the information from their W-9 as part of the on-boarding process. Routable’s software gives vendors the freedom to manage their own bank account information and W-9 details through a secure site, providing the privacy that email exchange does not always offer.
Vendors will always play a role in the day-to-day operations of business. From the independent UX consultant hired to research the efficacy of an interactive website design to the third-party service shop that keeps the delivery fleet running, these entities solve important business needs. And while asking for tax documents can feel awkward at the beginning of a new vendor relationship, it is necessary to lay a foundation of visibility and trust. Keeping everyone accountable in their tax returns promotes long term vendor engagement and reduces the stress and pressures of tax season.
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