14 Dec Why Do You Need My W-9 Form?
If you have been a bookkeeper for more than 10 minutes some service provider has probably dug their heels in and refused to give you a W-9 form or at least questioned the necessity of this information exchange. Here is my canned answer:
W-9s by IRS statute are a tool to enable the official provision of one’s tax identification and business information to someone with which there will be a financial transaction. It is a best practice to collect this from ALL service providers and anyone that MAY fall under 1099 guidelines because if you don’t you may find yourself up the creek. It is the responsibility of the business to properly document and remit tax documentation regarding various forms of payment including payments to independently contracted service providers. In order to do this properly, certain information is needed such as entity type and tax i.d. If a business fails to collect this information and therefore fail to properly or improperly 1099 an independent contractor they can be fined 10s of thousands of dollars. SO, we make it a practice to collect this information at the beginning of the engagement. If we find the entity to be an S or C corp it ends there. If they are an LLC or DBA and they are paid more than $600 a 1099 is generated at year end. That 1099 can include both services and materials or services only. This should make no difference to the recipient as the 1099 income should be being declared by the business anyhow. The IRS just compares 1098 remittances by business (yes not 1099) totals by tax ID and compares to declared gross income. If the recipient declares less gross income that the total of all 1098s they are reported on they could have trouble. If they report their gross income properly it will likely meet or exceed the 1098 totals and they are good to go. As a business, if we fail to collect the W-9 because someone tells us that they are a corp so we don’t need one and later we find out that they were an LLC and we failed to 1099 them we have no defense. Collecting the W-9 and being able to prove we acted in good faith is our responsibility with the IRS.
We always recommend collecting the W-9 before work begins and upon the first engagement with any individual or business that may fall under IRS 1099 rules. W-8 forms should be used for international folks.