We get lots of questions about the Form W-9. Independent contractors are not always sure if they need it, where to get it from, and who to give it to. Let’s shine some light on this mysterious Form W-9.
What is Form W-9?
Form W-9 is used to communicate to your client what information should be reflected on a Form 1099. The form is simple to complete but it is extremely important to fill it out with the correct information, so as to have your income reported correctly.
If you are a sole proprietor you will fill out the W-9 with your social security number. However, if you have an entity, whether that be an LLC, S corporation or a C corporation, you should list your Employer Identification Number (EIN) rather than your Social Security Number (SSN).
If you were to put your SSN on Form W-9, it would be reported under you, the individual, and not your entity. This would result in you not being able to shield that income from self-employment taxes. That kind of mistake can be costly!
When Paying Independent Contractors
For those of you that hire independent contractors to fulfill the various needs of your business:
Collect a Form W-9 from anyone that you make payments to, individual or entity alike. If they are an independent contractor, you need to collect the necessary information to file the payments correctly.
Whether this is a web designer that builds and updates your website, a copywriter that advertises for your business, or an accounting firm that keeps track of your business’ financials (For example Independent Contractor Tax Advisors LLC) ; you need to issue and collect Form W-9 from anyone you give payment to. (IC Tax clients: we handle your Form W-9 for the payments to our firm, so no worries.)
The IRS states that anyone that receives payment of $600 or more over the course of a tax year needs to fill out the Form W-9. The best rule in practice is to collect the form anytime you pay someone for anything, even if it’s below the $600 threshold.
The reason for that is, if you were to pay an independent contractor $400 in January, for designing a logo for your business, and at the time you think you won’t be engaging their services again. Then later in the year you need more design work done, and remember they met your expectations well, so you contract them for another job. Collecting a Form W-9 isn’t exactly at the forefront of your mind when this transpires, so you fail to collect it. This is a problem for both you and the contractor.
You then don’t have the necessary information to generate a 1099 to the individual you paid, and they wouldn’t have the information or proof needed to correctly file their taxes, because a W-9 is essential to issuing a 1099. Additionally, for every W-9 you fail to file, you may be fined $50 per instance. It’s just easier to collect it when you make your first payment for services.
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For our clients: You should be mindful to provide W-9s you collect to your bookkeepers. They use the information from the form to connect the transactions to those you pay.
Hopefully, after reading this article, you won’t find yourself asking, why IS Form W-9 so important.
When running your own business as an independent contractor, there is so much to keep track of and maintain in order to run an effective and compliant business. That’s where we come in. Independent Contractor Tax Advisors knows your needs in detail. We know exactly what to do and how to do it, saving you thousands in taxes. Contact us today for a free tax consultation!
CLICK HERE FOR A FREE TAX CONSULTATION
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