Are you familiar with Form W-9? If your business ever pays for services, you should be.
Form W-9 is published by the IRS for the purpose of collecting taxpayer identification numbers. There is so much more to this little form, though. My firm will not process payment for a vendor without first obtaining a signed W-9.
What’s so important about Form W-9, and why should you request it of every service provider before you issue payment to them? Read on.
Short form. Tons of information.
As official IRS documents go, Form W-9 is short. Super-short. The entire form is four pages long, but 3 1/4 of those pages are detailed instructions most payees can disregard.
So, what information does Form W-9 provide that you can’t get from the vendor’s invoice?
1. Payee’s legal name
This is critically important. For example, my firm’s name is Pocket Protector Bookkeeping. On the rare occasion a client writes us a check rather than issuing electronic payment, that check is made payable to Pocket Protector Bookkeeping. In the client’s books, we are listed as Pocket Protector Bookkeeping.
However, for tax purposes our legal name is Billie Anne Grigg.
That’s right. Line 1 of the Form W-9 we complete for our clients shows my name. Pocket Protector Bookkeeping goes on Line 2 of the form.
Even though we provide an employer identification number (EIN) on Part I of Form W-9 instead of my Social Security Number, I am personally still considered the taxpayer because my business is a disregarded entity. That’s a fancy way of saying we are not incorporated or taxed as a corporation.
Why is this important? When clients issue their 1099s at year-end, the 1099 should be issued to Billie Anne Grigg, DBA Pocket Protector Bookkeeping. And the DBA is optional. Issuing a 1099 to Pocket Protector Bookkeeping could result in a fine for providing incorrect information, because that is not the legal name of the business.
Think about how many small businesses you pay throughout the course of the year. Chances are, a good number of those businesses are sole proprietorships or disregarded entities. However, you would have no way of knowing that without first obtaining a Form W-9.
2. Payee’s taxpayer identification number (TIN)
This is another piece of critically important information. By law, every business who pays an unincorporated service provider more than $600 during the course of the calendar year must issue a 1099 in January of the following year. Different rules apply to attorneys and change depending on how you pay the service provider.
Failure to issue a 1099 can result in hefty penalties, but you can also be penalized for issuing an incomplete 1099. Most often, a client will have all the information required to issue a 1099 except for the TIN.
3. Certification of exemption from backup withholding
The IRS is serious about collecting tax revenues. Certain payees are subject to 28% backup withholding, meaning any payments made to them must be reduced by 28%. The withheld amount must then be remitted to the IRS.
By signing Form W-9, your payee certifies they are exempt from backup withholding. In other words, the signed Form W-9 is the only proof your business has that you did not knowingly fail to withhold and remit the 28% backup withholding.
So, what’s the new habit you mentioned?
Many bookkeeping and accounting firms spend a good portion of each January trying to obtain W-9s. We do this so we can keep our clients in compliance with 1099 filing requirements. With the increase in penalties for failure to file correct 1099s, it only makes good business sense to obtain Form W-9 before paying your service providers.
Insist on obtaining Form W-9 when you first start doing business with a new service provider. Make it very clear you will not issue payment to them without this document. If the service provider will not provide it, ask yourself if it is worth the risk for you to do business with them.
You work hard to make your business profitable. This one small step will help ensure you don’t throw away money on unnecessary penalties.