Independent contractors and service providers are indispensable to the smooth functioning of your business. They make peak seasons manageable and can help your business meet demand when full-time employees are not yet an option. However, having a group of contractors can create issues during tax season due to one form—the W-9. Any missing, incomplete, or incorrect details on this form can cause tax filing delays, penalties, and unhappy contractors. This article provides a comprehensive understanding of form W-9 - its definition, importance, how to ensure it has the correct information, and how to automate the process.

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What is Form W-9?

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Officially known as the Request for Taxpayer Identification Number and Certification, Form W-9 is a crucial document that collects taxpayer information (also known as an information return) from independent contractors. While businesses are not required to submit this form to the IRS, its data is used to complete 1099-NEC forms for reporting non-employee compensation. These forms, which are submitted to both the IRS and the contractors, play a vital role in the IRS's tracking of payments made to contractors for tax purposes.

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Businesses that hire independent workers are responsible for requesting the W-9 form. Each contractor must complete this form with their name, address, and taxpayer identification number (TIN), which can be their Social Security Number (for individuals) or Employer Identification Number (for individuals or entities).

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However, only contractors receiving payments totaling at least $600 within the calendar year must complete a W-9 form. Additionally, the following types of workers are covered by this form:

• Independent Contractors: Non-employee individuals/agencies contracted to render services for a longer period, often renewed yearly.
• Freelancers/Gig Workers/Consultants: Self-employed individuals hired during a specific project or period, such as website designers and temporary office workers.
• Vendors/Service Providers: Individuals or companies that provide equipment repair or maintenance services.

What Happens If Your Business Receives Incorrect W-9 Forms?

Three main issues can arise from incorrect or incomplete W-9 forms:

• Filing Delays and Fines: The IRS fines businesses that do not file correct information returns, including 1099 forms, by the deadline. These penalties range from $60 to $630 per incorrect filing, depending on the lateness, non-filing, or intentional disregard of the filing requirements.

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• Backup Withholding: If a contractor doesn't provide a correct TIN, businesses must withhold 24% of their payments for federal taxes. This can complicate your payroll process.

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• Administrative Burden: Chasing down contractors for missing information and correcting errors can take time and effort, diverting valuable time from growing your business.

How to Review Form W-9

While filling out a W-9 form can be straightforward, contractors may overlook important details. When reviewing their submitted forms, carefully check the following information:

• Name and Business Name: The contractor’s name should match their tax return. If they have a business, the business name should also be listed.
• Federal Tax Classification: Ensure the appropriate box (individual/sole proprietor, corporation, partnership, or trust/estate) is checked.
• Address: Verify that the address provided is where the contractors receive their mail.
• TIN: Advise contractors to double-check that their Taxpayer Identification Numbers are correct.
• Certification: Confirm that the contractor has signed the form and include the date of signing.

The most common mistakes include incorrect TINs, missing information or fields, and wrong tax classifications, so be extra vigilant when reviewing this data.

Using Form W-9 to Process 1099 Forms

Once you're sure the submitted W-9 forms are correct, use them to prepare 1099-NEC forms, which report your payments to non-employees for the past year. The 1099-NEC  should be filed by January 31.  

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Note: There are two types of 1099 forms; here’ a quick summary no which one is relevant for independent contractors:

• 1099-NEC (Non-Employee Compensation): Filed for payments made in exchange for services or products.
• 1099-MISC (Miscellaneous Income): Filed for unusual forms of payments, such as royalties, prizes, and crop insurance proceeds.

Here are some tips to keep in mind when filling out 1099 forms:

1. Gather Completed W-9 forms: Transfer the information, including the total amount of compensation and any income tax withheld (if applicable), to the corresponding 1099-NEC form.
2. Use the IRS Information Returns Intake System (IRIS) Taxpayer Portal: This free online platform allows you to fill out and submit 1099 forms conveniently without the need for additional software.
3. Consider Hiring an Accountant or Tax Expert: This can be especially helpful if you have many contractors or accounts to manage.
4. Use Accounting Software: This can help generate and file 1099-NEC forms, eliminating manual tasks and reducing the chance of human errors.
5. Ensure Contractors Receive Copies of Their 1099-NEC Forms: They will need these forms to report their self-employment income to the IRS.

Automating the Form W-9 Collection Process

Manual W-9 form processing is less accurate and efficient than using accounting or tax software to generate these forms. These tools offer features that simplify the W-9 form collection process:

• User-Friendly Interface: Contractors can fill out and submit their forms electronically without navigating through multiple links or pages.
• Alerts and Notifications: Users receive immediate warnings about missing information or incomplete fields on the form.
• Electronic Signature: Contractors can sign digitally, making certification and authorization easy.
• Secure Storage and Access: Sensitive information is protected through encryption and strict employee access controls.

Frequently Asked Questions About Form W-9:

Q: What if a contractor made a mistake on their form?

A: Immediately request a corrected form from your contractor when you discover an error.

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Q: How long should I keep W-9 forms on file?

A: The IRS recommends keeping them for at least four years after the last payment to the contractor.

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Q: Do I need a Form W-9 for every contractor, even if they only worked a few hours?

A: As long as your payments to the contractor reach at least $600 within the year, you must request a form from them.

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Q: What should I do if a contractor refuses to complete a W-9 form?

A: Let them know that without this form, you must withhold taxes at a higher rate from their payment.

Make Tax Filings Stress-Free with Decimal

Keeping up with W-9 forms doesn’t have to be a nightmare. With Decimal, you can automate the entire process, ensuring you collect and store these forms without the headache. Our tax services offer tailored solutions to integrate Form W-9 and 1099 filings seamlessly with your accounting/bookkeeping software. We also provide tax consulting so you can be confident that you’re taking advantage of write-offs and other potential tax deductions.

‍Schedule a consultation with a bookkeeping expert and say goodbye to stressful tax preparation.