The W9 Form: What Small Business Owners Need To Know
The IRS Form W-9 is important for small business owners. You’ll need this whenever you hire an independent contractor for your business. It’s a good idea to have all independent contractors complete this form before you pay them.
What Is The W9 Form?
The W9 form requires the contractor to list his or her name, address, and taxpayer ID number. Corporations, partnerships, and sole proprietors with employees must have a federal employer identification number. For sole proprietors, the taxpayer ID number is either the contractor’s Social Security number or an EIN.
The W-9 form also contains boxes to check showing how the contractor’s business is legally organized. This includes sole proprietor, C Corporation, S Corporation, Partnership, or Limited Liability Company. When contractors sign the W-9, they certify under penalty of perjury that they have completed the form correctly. They also certify they are not subject to backup withholding and are a U.S. citizen.
You need not file the W-9 form with the IRS. Just keep it in your files.
Form W-9 serves two important purposes for businesses that hire independent contractors to perform services:
- It collects taxpayer identification data you need to complete IRS information returns due January 31 each year
- it enables you to avoid backup withholding.
Completing Form 1099-MISC
Whenever you hire an unincorporated independent contractor to whom you pay $600 or more by check or cash during the year, you must file a 1099-MISC form reporting the payments to the IRS by January 31. The information on the completed Form W-9 will enable you to complete the 1099-MISC correctly.
How To Avoid Backup Withholding
If you don’t obtain a record of an independent contractor’s taxpayer ID number, you may be required to do back-up withholding. Backup withholding is like employee withholding. You have to withhold 28% of all payments over $599 you make to the vendor. Remit the money each quarter to the IRS.
You deposit backup withholding payments separately from the payroll tax deposits you make for employees. Backup withholding is not required if the contractor is incorporated or a limited liability company (LLC).
If you fail to do backup withholding when required, on audit the IRS may impose an assessment against you equal to 28% of what you paid the contractor. You’ll avoid this if you have a completed Form W-9 on file.
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