Key Takeaways
1. The W9 form is a document used in the United States to collect taxpayer information from self-employed individuals such as independent contractors and freelancers for tax reporting purposes.
2. The W-9 form is not submitted to the IRS but is used to help businesses gather taxpayer information from self-employed individuals they pay. The information collected on the W-9 form is then used by the business to report payments made to the individual to the IRS.
3. Investment companies may also require a W-9 form from clients to report dividends, interest, and capital gains to the IRS accurately and comply with tax reporting regulations.
4. Backup withholding is a mandatory tax withholding from payments made to an independent contractor who fails to provide or certify their taxpayer identification number on the W-9 form.
IRS Form W-9, also known as the ‘Request for Taxpayer Identification Number and Certification’, is a standard tax document used by businesses in the U.S. to collect taxpayer identification information from external parties such as independent contractors and freelancers. By having these individuals complete a W-9 form, businesses can ensure that they have accurate and up-to-date taxpayer information, which is necessary for preparing and filing tax documents such as Form 1099.
In this article, we will delve into the specifics of the W-9 form, including the information it contains, and the circumstances in which it is required, to help your organisation understand and meet its tax reporting compliance.
Who needs a W-9 tax form?
An employer or business in the U.S. may need to collect a W-9 form from an external party they make payments to for services rendered, such as independent contractors, freelancers, vendors, or other businesses. The W-9 form is only relevant for individuals and businesses who are subject to U.S. tax laws and have a tax identification number (TIN) issued by the IRS. Nonresident Aliens (NRAs), on the other hand, are required to submit a W-8BEN form to certify their foreign status for tax purposes.
Relevant individuals are required to fill out the W-9 form and provide it to the company or person requesting it. It is worth noting that the W-9 form is not a tax return form, and is not filed with the IRS. Rather, it is a tool that helps companies collect the necessary taxpayer identification information from individuals or businesses they pay, to comply with tax reporting requirements.
There are several situations in which an individual may be required to fill out a W-9 form:
- When hiring: The most common scenario is when a company hires a freelancer, independent contractor, or self-employed individual, also known as a 1099 contractor. In this case, the company can ask the individual to provide a completed W-9 form to collect their TIN and other necessary information for tax reporting purposes.
- Opening an account: The information collected on the W-9 form helps banks to fulfill their tax reporting obligations and maintain compliance with the IRS. Banks may request a W-9 form from customers who are opening a new account in order to obtain their TIN and to report any interest earned to the IRS accurately.
- Debt forgiveness: If a lender cancels or forgives a debt, the canceled debt may be deemed taxable income which the lender will be required to notify the IRS about. In this case, they may ask the debtor to submit a W-9 form to provide their TIN and other necessary information needed to report the canceled debt to the IRS.
- Investments: Investment firms may ask their clients to submit a Form W-9 to report information such as dividends, interest, and capital gains to the IRS. In doing so, they can ensure they have accurate taxpayer identification information and fulfill their tax reporting requirements.
What is on a W-9 form?
A W-9 form is a one-page document that is divided into four sections, as follows:
- Section 1: Name and Address
- The first section requires the individual or business to provide their name and address. For individuals, this includes their full name and current address. For businesses, this includes the legal name of the entity, as well as the address of the principal office or place of business.
- Section 2: Taxpayer Identification Number (TIN)
- In this section, the individual or business must provide their TIN. For individuals, this can be a Social Security number (SSN) or for businesses, an Employer Identification Number (EIN).
- Section 3: Certification
- This section includes a certification statement that must be signed and dated by the individual or business concerned. By doing so, the individual or business certifies that the information provided on the form is true and accurate and that they are not subject to backup withholding (explained further below).
- Section 4: Exemptions
- The fourth section is optional and only needs to be completed if the individual or business is claiming an exemption from backup withholding. This section requires the individual or business to provide a detailed explanation of the exemption they are claiming and the reason for it.
Overall, the W-9 form is a relatively simple document to fill out compared to many other IRS forms. It’s preferred format is often PDF so you’re typically required to convert to PDF as a final step to creating this document.
Video — How to Fill Out a W-9
What is backup withholding?
Backup withholding refers to a percentage that is withheld from payment and sent to the IRS. It is a tax withholding that the IRS requires organisations to take from certain payments if the recipient’s TIN is incorrect, they have not provided a TIN, or the IRS has notified the organisation that the recipient is subject to backup withholding.
When a taxpayer such as an independent contractor is subject to backup withholding, it means that the business paying them must withhold income tax, currently at 24%, from the payment amount and send it directly to the IRS.
The purpose of backup withholding is to ensure that the IRS receives taxes from individuals or businesses who may have underreported or failed to report income on their tax returns, helping them to recover unpaid taxes and enforce tax compliance.
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Frequently Asked Questions
A W-9 form is used by self-employed workers such as independent contractors, freelancers, and vendors to provide their TIN to the companies they work for, while a W-4 form, like a W-2 form is used for employees to notify their employers of the amount of income tax to be withheld from their paychecks.
The W-9 form is a request for information, while a 1099 is a tax reporting form. Businesses use W-9 forms to gather taxpayer information from independent contractors, such as their legal name, address, and TIN. Once payment has been made, businesses use a 1099 form to report the total amount paid to the IRS.
