Business owners often augment their teams or seek the expertise of freelancers and contract workers for specific functions. Too often, business owners forget to properly document their vendor’s information and earnings, which are needed to file with the IRS. One key form you will need to have a vendor complete is Form W-9. This will ensure you have all the necessary information needed to file your business taxes and take advantage of one of the many small business tax deductions.
What is Form W-9?
A W-9 is a form used by the IRS, businesses, and freelance/contract workers to provide taxpayer-identification numbers to the entity that is required to file a form with the IRS. Using Form W-9 helps to ensure that you are working with legal and legitimate businesses that are maintaining their own tax compliance. The information collected on a W-9 is used to complete Form 1099 each January, which is filed with the IRS and sent to the contract worker to report earnings.
Who needs a W-9?
A W-9 is required for a business-to-business relationship where you have paid a freelance worker or subcontractor $600 or more in one calendar year. While this threshold is provided by the IRS, a best practice is to ensure every vendor you are working with has filled out a W-9 to report all income. Even though a vendor is paid less than $600 per calendar year, all earnings should still be reported to the IRS. By collecting a W-9 from everyone you do business with, you will be protecting your business and staying on the good side of the IRS.
When should you collect Form W-9 from contractors?
There are no specific requirements dictating when a business owner needs to collect a W-9 from a contractor. However, the best practice is to collect a W-9 from every contractor with whom you do business with before you begin using their services or goods. Doing so will ensure you have all the necessary information needed to file a 1099 should they cross the $600-per-year threshold. Collecting a W-9 at the outset of a business relationship will save you as a business owner (or your accounting department) valuable time when completing 1099s in January.
A helpful tool for busy business owners is to use a cloud-based vendor payment system where vendors can enter their W-9 information as a part of the onboarding process. An app to manage the process will take one task off your plate and keep all vendor information safe and organized in one place. Your business CPA will thank you!
On the flip side, as a contract or freelance worker, get into the habit of sending a completed W-9 to your clients before you begin working together. Doing so will help you out in January when your clients are working on their 1099s and help to ensure your income is reported properly.
How to fill out a W-9
Form W-9 can be found on the IRS website. The individual completing a W-9 needs to provide the information listed below:
- Employer identification number (EIN) or social security number
- Business name, or personal name for a sole proprietor
- Legal form of business structure
- Business or personal address
If the freelance or contract worker does not feel comfortable providing his or her social security number, he or she has the option to register as a business to avoid providing personal details.
Common mistakes with Form W-9
The most common mistake we see vendors make on a W-9 form is forgetting to include their business legal structure (generally LLC). We also see vendors making the mistake of listing their disregarded entity on line one. A disregarded entity is an LLC with only one owner/member. They are disregarded by the IRS because the IRS looks past the LLC to the owner for federal tax purposes. A disregarded entity should list their personal name on line one, and the entity name on line two, while checking the “Individual/sole proprietor or single-member LLC” box. Other common mistakes include failing to sign or forgetting to put your name on line one. These mistakes can lead to the IRS requiring a corrected W-9, and in some cases, a penalty levied by the IRS.
The beginning of the year is a great time to check in with your vendors and contractors, making sure you have collected W-9s from all vendors with whom you will do business this year. If you find yourself missing this vital step, a cloud-based accounting app (such as Gusto) may be the helping hand that you need. You can onboard vendors, collect their information, and pay vendors in more than 80 countries right through the app. Send us a message to discuss how implementing a cloud-based app could make your vendor (and tax filing) experience better for both your and your vendors.