Whether you have been in business for years or you are just starting, there never seems to be a shortage of tax-related paperwork to be filled out. One necessary form that needs to be filled out by a new client or independent contractor is the Form W-9, Request for Taxpayer Identification Number and Certification. This form is essential to the process of reporting your earnings to the IRS. Generally, this document is for when a person or entity is expected to report certain types of income paid. Consequently, it is beneficial for everyone to learn exactly what Form W-9 is and how to fill one out correctly. Let’s go over those two things plus everything else you need to know about a Form W-9.
In essence, this document is a one page IRS form that is used to send a person’s or company’s taxpayer identification number to other businesses and financial institutions. This form also certifies that you are not subject to backup withholding. Even as an independent contractor or self-employed person, you need to fill out this document as your clients may be required to report your compensation to the IRS and complete a Form 1099-MISC for your reporting purposes. That said, a W-9 asks for a few significant pieces of personal information:
Despite this form being around for decades, many people still do not know the difference between Form W-9 or Form W-4, (Employee’s Withholding Certificate). This article will help you understand the difference between the two and why they matter.
Form W-4 is a document that you are required to fill out when you start as an employee at a new job. Your employer then uses this form to determine how much to withhold from your paycheck for taxes. A full-time employee should fill out a W-4, whereas an independent contractor should fill out a W-9. Both forms request similar information like your name, social security number, address, and zip code. But again, a W-4 is only for paycheck withholdings.
Another form that is pertinent to this discussion is Form 1099. As an independent contractor, you should fill out Form W-9 to provide the necessary information and tax responsibilities to your employer. In return, your employer will use this information to complete a 1099 on your behalf. Thus, a 1099 essentially details a freelancer’s or independent contractor’s income for the year. Moreover, several different versions or types of Form 1099s relate to the nature of the revenue. Regardless, you will receive a 1099 in the mail in January so you can file your taxes.
There are several examples of W-9 income. Typically, the most common income categories are dividend, 1099 nonemployee compensation, stock income, mutual fund income, broker transactions, and real estate transactions. You’re legally required to report this income to the IRS. Other common types of W-9 income include paid mortgage interest, acquisitions of secured property, cancellation of debt, abandonment of secured property, and contributions made to an IRA.
Form W-9, as you may have noticed by now, is full of terms like backup withholding, exemptions, and taxpayer identification number. Though these terms have been briefly touched upon already, here is a quick refresher, nonetheless. Backup withholding is the percentage of income that is held and given to the IRS from your paycheck. Exemptions, in this particular case, only apply to certain businesses or entities. Here, the exempted company will enter the appropriate code for this section on the W-9. Finally, the taxpayer identification number, also known as TIN, is just your social security number if you fill this form out as an individual. As a business entity, TIN is your employer identification number (EIN).
Generally, when dealing with a W-9, it is not necessarily a question of who needs to fill it out, but rather when. Mainly independent contractors, self-employed person(s), consultants, and freelance workers fill this form out. However, this form is only required when you make more than $600 a year from one client/company. Another scenario when a W-9 may be necessary is when you open a new bank account. Financial institutions may also require a W-9 form for when you receive interest income.
Filling out this form is relatively easy, especially if you are an individual or an independent contractor. All you need to do here is fill out the applicable sections, i.e., print your full legal name, business name (if applicable), address, select the appropriate business entity, add your TIN, then sign and date it. When figuring out which business entity to choose, you have the standard options—sole proprietor, C-Corporation, S-Corporation, partnership, trust, LLC, other. It is important to select the right entity; therefore, you should reach out to your accountant to confirm your business’s status, if applicable.
If you are a limited liability company (LLC), there are few things to keep in mind when filling out your W-9 form. For instance, if your business has LLC status for tax purposes, but your LLC is separate from you, i.e., like a C-corp, S-corp, or partnership, then do not select LLC on the W-9 form. Alternatively, if another LLC owns your LLC, then you may check the LLC box. However, you also need to indicate the entity status for the parent LLC. Moreover, if only you own the LLC, it is generally recommended that you list your personal information and social security number instead of your business information. If you have questions regarding your LLC status, then make sure you speak with a tax professional for clarification.
For many people, if they completed a W-9 in the past, they believe they never need to update the form again. But this is not the case. There are new W-9 forms provided by the IRS each year, and if your information has changed or someone needs a more current completed Form W-9, then it is highly recommended you fill out a new form. With that said, if an unexpected source is requesting a W-9 and you are hesitant to fill one out, then you should wait. Legally, a W-9 is only required if said party will pay you some form of compensation, interest, dividends, or another form of reportable income. Therefore, if the request does not align with these forms of payment mentioned above, you should ask why this unexpected source needs this information.
Then again, if you forget or neglect to send a required W-9, do not be surprised when withholdings are taken out of your payments. Often this can be as much as 28 percent, so make sure you provide the necessary forms when you are supposed to. You may also be opening yourself up to issues with the IRS later on and fines, since it’s unlikely you’ll be receiving a 1099 form, come January.
Lastly, there can be a few red flags that you need to be mindful of as well. For example, if you are dealing with someone who seems a little shady, this should give you cause for concern. Remember, you are still providing sensitive personal information to someone via this form. Thus, you must make sure you don’t just give it out to just anyone. Likewise, you should try to send your W-9 via US mail or an encrypted email. Faxing sensitive information can easily end up in the wrong person’s hands. Other red flags to keep an eye out for are receiving a W-9 instead of a W-4 and when the purpose of the W-9 is unclear. It is vital that you know why a W-9 is being requested or if there has been a miscommunication between you and your new employer regarding your employment status.
Ultimately, W-9s are pretty straightforward. So, you can finally stop asking yourself what is a Form W-9, and how do I fill it out? At the end of the day, all you really have to do is make sure you fill them out correctly, update the form when necessary, send them in a timely fashion, and keep an eye out for red flags. These proactive steps will ensure that your sensitive information is not just out there and that your employer has the correct data to provide you with a 1099 form in January. If you have additional W-9 questions, you can find more information on the IRS’ W-9 form website or connect with one of our Taxfyle Pros that can file your taxes for you and answer whatever questions you have along the way.
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