It’s common knowledge that if you’re an employee of a company, you are issued a Form W-2 for tax purposes to report wages paid to and taxes withheld from your salary for the given year. But what if you aren’t an employee and provide services to a company with whom you aren’t directly working for as part of their payroll? In these instances, you would be classified as an independent contractor (freelancer/sole proprietor). The company you’re providing a service to will need a way to report your earnings to the government if your total compensation for that year exceeds $600. That company will ask you to fill out an IRS Form W-9 to collect your vendor information.
The primary purpose of a Form W-9 is simple really - it presents your taxpayer information to the entity that requested it (in other words, the company you contracted with). It is a one-page information form that individuals and small businesses utilize to present these key pieces of information:
- Name of the Person and/or Business (if applicable and has a “doing business as” name or DBA)
- Employer Identification Number (EIN) or Social Security Number (SSN)
- Entity Type
The main item here is your Taxpayer Identification Number (TIN), which is either your EIN or SSN. Due to the highly classified nature of a person’s TIN, you must ensure the legitimacy of the entity requesting the form before sending it out. This form isn’t filed directly to the IRS, but rather returned to the requester which they will then use to issue said non-employee a Form 1099-MISC (which in short is a W-2 for independent contractors). Again, if you’re a non-employee who didn’t receive more than $600 during that calendar year for a company, you don’t need to fill out a W-9.
If you do, filling out the form is pretty painless. You’ll input your legal name (as shown on your tax return) and the name of your business (if you operate under a DBA) at the top of the page. You’ll select the type of business entity you operate in the appropriate checkbox (whether it be as an individual, sole proprietorship, single-member LLC, C-Corp, S-Corp, Partnership, Trust/Estate, or LLC). After inputting your address and TIN, you’ll provide your signature and date of signing to complete the form. There is a section in the W-9 that covers Exemptions, which are codes that apply to specific entities, not individuals, to being exempt from backup withholding or Foreign Account Tax Compliance Act (FACTA) reporting requirements for financial institutions. In short, backup withholding is withholding taken from different forms of payments and income by companies and banks. You can find more detailed information on exemptions and backup withholding on pages 3 and 4 of the Form W-9 on the IRS website.
Typically, companies will issue a W-9 before they pay a contractor (even if they don’t expect them to cross the $600 threshold) as it’s easier for them to have their expenses organized come tax season. However, if you’re a non-employee contracting work for a company and know that you’re eligible for a 1099 but haven’t received your W-9, you can always download the form from the IRS website and send it to them directly. Keep in mind that when sending a W-9 to your requester, DO NOT send it as an unprotected email attachment given the since it contains sensitive information. Make sure to send it either through hand delivery, U.S. mail, or an encrypted email attachment to guarantee your security.
A lot of companies nowadays will use third party services such as Track1099 to circumvent these security risks because of the convenience it provides. Not to mention those companies only have to pay for the forms sent out not for the entire service itself, which is a huge value add. Through Track1099, companies can send encrypted emails to their service providers with the W-9’s attached so contractors can fill out the forms electronically and send them back to provide them their 1099’s come filing time. At the end of the day, you can’t receive a 1099-MISC without an accurate Form W-9, so be sure that it’s up to date in the event that your legal or business name, address, or TIN change throughout the year.