Are you an independent contractor? That is, do you provide services to one or more businesses each year as a non-employee? If you receive over $600 in a year from an individual or business, the payer must provide you with a Form 1099-NEC (known as a Form 1099-MISC, before 2020) to verify your income to the IRS. Before preparing Form 1099-MISC, you must give your payer a valid taxpayer identification number. The form used for this information is a Form W-9.
What is Form W-9?
Form W-9 is a tax document that must be signed by independent contractors to provide a taxpayer ID number (Social Security Number or Employer ID). If the employer doesn't have a taxpayer ID, or if the taxpayer ID is incorrect, the independent contractor must have federal income taxes withheld, known as "backup withholding."
Form W-9 is a standard tax document often utilized in business and financial transactions. So by itself, a W-9 doesn't pose many problems. Still, there are some simple issues to be aware of.
Because the Form W-9 is asking for your name, address, and Social Security or business Employer Identification Number, you should exercise caution in giving out that information. Be sure that you know who is asking you to fill out the form—and why—and how your tax information will be used.
Complete Your Business Information Correctly
Form W-9 requires you to include information on your business type.
The IRS has somewhat simplified Form W-9. To complete the new W-9, follow these steps:
- Make sure you are entering your taxpayer ID correctly and that you are entering the correct taxpayer ID. This is the main purpose of the form, to verify this information. The questions may come when your business is an LLC. A single-member LLC files federal income tax returns as a sole proprietor, and multiple-member LLC files as a partnership.
- You will be asked if you are subject to backup withholding. Most people are not, but if you have questions, see this article about backup withholding.
- You will be asked if you are subject to reporting foreign assets (called FATCA reporting). Unless you have assets in a foreign country, this section won't apply to you.
Two items in this section need clarification:
FATCA is the Foreign Account Tax Compliance Act that requires foreign financial institutions and other non-financial foreign entities to report on foreign assets held by U.S. account holders. On Form W-9, some individuals may have to report foreign income through the FATCA process. Most individuals and businesses are exempt from this reporting requirement. The certification section includes a statement that you are exempt from this requirement. If you aren't exempt, you'll need to provide additional information to the recipient.
Backup withholding is required for a variety of reasons. The most common reason for backup withholding is if the signer of the W-9 doesn't have a valid taxpayer ID number or the number is missing. If you submit a W-9 without a valid taxpayer ID, or if your tax ID is invalid, your employer will be required to withhold federal income taxes from your payments—backup withholding.
Transmit the W-9 Securely
The W-9 contains sensitive information that should be kept private and secure. Don't send your completed W-9 as an unsecured or unencrypted email attachment. Instead use secure methods of transmission, such as hand delivery, mail, or encrypted file attachments to an email to the person who requested it. (Employers of independent contractors don't transmit W-9 forms; they are kept in the employment file.)
Receiving a W-9 When You Expected a W-4 Instead
If you are starting a new job and your new employer hands you a W-9 to fill out, ask if your new job is as a self-employed contractor or as an employee. Employees fill out the Form W-4 to set their tax withholding level.
Self-employed persons (independent contractors) don't have income taxes or Social Security/Medicare taxes withheld. You and your employer can discuss the issue of your status, but it's the IRS that ultimately decides whether a worker is an employee or an independent contractor (self-employed).