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Everything You Need to Know

Stay up-to-date on the latest W9 form filing information and best practices with our detailed knowledge base.

What is the W-9 form?

The IRS Form W-9 is one of the most common forms you’ll come across. It’s basically an information request whenever you make a payment to someone (company or individual person) in the ordinary course of business. The W-9 information is then used to produce a 1099 at the end of the year. The most common 1099 being, the 1099-NEC.

A 1099 can be used for many purposes but is mostly issued in the context of “Non-Employee Compensation” which will be the focal point of this discussion. This was recently changed from the terminology of “1099-MISC” to make a strong distinction from an employee and an independent contractor (non-employee). Why is this important? An employer and employee pay a lot of tax to both the federal and state agencies upfront while an independent contractor reports the taxable income at the end of the year after business expenditures have been deducted and can avoid paying tax altogether.

The contractor should earn more than $600 to receive a 1099 but many companies issue the 1099 regardless of the amount. The contractor can be a Sole Proprietor, a Limited Liability Company, and even a Corporation. In sum, the W9 form ensures that the information is accurate so all money is being accurately reported and taxed and also so that the person/company paying the money can take a deduction.

For example, if FormW9.com provided a tax service to the XYZ Company and we received $1,000 in payments, we would have to report the $1,000 from XYZ on my tax return and The XYZ Company in turn would deduct that same amount of expense in their books under contract labor expense.

Here are the basics:

  • Obtain a W9 before the start of work
  • Confirm the TIN number
  • The payee(receiver) of funds will need to complete a W9 Form
  • The payer should retain a copy of the W9 Form on file to complete the 1099 form
  • Typically, anyone receiving $600 or more receive a 1099 form
  • Form W-9 does not get sent to the IRS but they may request to access it
  • Remember that 1099s are based on actual money received NOT money to be received

What is the difference between an Employee and Independent Contractor?

The IRS will look for three key differences to identify an independent contractor versus an employee:

An independent contractor (person or entity) is truly free from control and direction of the hiring company which means the contractor typically uses his own equipment to complete the work product; The independent contractor performs work that is outside the normal course of business of the hiring company; andThe independent contractor has an established business in that particular trade as the work being requested to perform perhaps under a contractor agreement.

An employee (person not company) works under the guidance of a supervisor or manager and is told what to do; An employee performs the same kind of work as the industry the company is in;andThe employee has some sort of arrangement that defines his or her job duties perhaps with a job offer letter.

Finally, an employee gets paid a paycheck on a particular schedule with required payroll taxes deducted and can qualify for unemployment under his or her employers’ company account. An independent contractor usually submits invoices to the accounting department and gets paid via an accounts payable check.

When do I ask for a W-9?

Once an independent contractor agreement has been made, it would be wise to request that a W-9 form be completed. The problem with not receiving this information upfront is that the independent contractor may not provide this to you later on in an attempt to avoid paying taxes. This would jeopardize your business deduction and thereby unnecessarily raising your bottom line.

Another issue can arise where the Internal Revenue Service could require you the hiring party to withhold tax on IRS form 945.

Regardless of all this, as a business owner hiring an independent contractor you must the weigh the costs and benefits involved. For instance, if you have an amazingly hardworking contractor that denies providing his personal information, are you really going to deny this person the project? Furthermore, if you intend to take the expense without issuing a 1099, you run into the risk of an IRS audit that would potentially require you to remove the expense and pay penalties and interest.

Bottomline is if an independent contractor pushes back your request for completing a W-9 upon hire, it might be a sign of trouble to come.

Can I Keep Using the Independent Contractor If They Don’t Provide Me A W-9 or TIN?

The problem won’t be whether the W-9 will be received but losing your independent contractor.

There a couple reasons for this happening:

  • First, contractors that skittish about providing their information are probably trying to avoid paying tax
  • Secondly, the IRS requires you to request a W-9 form in writing from the vendor a minimum of three times
  • Thirdly, the IRS rules state that you must withhold 24% from that contractor until you obtain that information

In sum, after three times of trying to obtain a W-9 it will become pretty obvious that your contractor doesn’t want to provide this information and is trying to avoid tax, worst yet once you start withholding 24% of the money from him, he’ll definitely not want to resume his position. If the contractor provides his information, you can prevent withholding their tax.

The question will then be whether you want to risk major penalties for intentional disregard and/or not take the expense deduction on your tax return.

What is EFTPS and Why is this important?

IRS has developed a system to allow a safe, secure way to transmit tax payments, the Electronic Federal Tax Payment System (EFTPS).

However, it is a process to enroll and setup the login:

  1. First, you’ll have to enroll here: https://www.eftps.com/eftps/enrollment/new-enrollment-flow
  2. Then, in this enrollment you’ll want to include your bank information (it’s a secure IRS website)
  3. Wait for your PIN to come in the mail after the IRS verifies your bank. The IRS does this to verify your mailing address.
  4. Finally, log back into the EFTPS and click need password, once you enter the PIN here you’re all set to make payments to the IRS. Joy!

If this does not work you can always use to your login to pay over the phone: 1-800-555-3453

The 593 form is a California specific form used to determine whether or not there should be state tax withheld on a property sale by the seller (individual, business entity, trust, estate, or REEP).
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