W9 Form Basics for Small Business Owners

W9 Form Basics

Tax forms can seem daunting. With names like W2s, W9s, 1099s, and W4s, they can even sound like an encrypted code.

However, with a clear understanding of each document’s purpose, tax season becomes less of a grind and easier to navigate. For example, W9 forms are essential documents that require little effort. Keep reading for a better understanding of W9s, including what they are, how to fill them out, and how they compare to other forms.

What is a W9 Form?

To understand W9 forms, you must first have some background on 1099 forms. Businesses file 1099 forms for tax purposes when they have paid more than $600 to independent contractors (also known as self-employed, freelancers, or 1099 employees) during the tax year. Companies don’t withhold any money from independent contractors’ checks, but they are still required to use a 1099 to report how much they paid the contractor to the IRS.

Companies need certain information about the contractor to complete these 1099 forms. This is where W9s comes in. Businesses send W9 forms to U.S. resident contractors to request their personal information, including a tax identification number (TIN), which is used by the IRS to identify a taxpayer. TIN’s are often a person’s social security number.

The businesses then use this information to complete 1099s. Most businesses ask contractors to fill out W9 forms before they begin work. This prevents delays when issuing 1099 forms and makes it easier to obtain the information.

Businesses also issue W9 and 1099 forms for other forms of income such as:

  • Real estate transactions
  • Abandonment or acquisition of a secured property
  • Contributions to an IRA
  • Mortgage interest paid
  • Cancelation of debt
  • Dividends
  • Miscellaneous income
  • Broker transactions such as selling stocks and mutual funds

Each of these taxable incomes require businesses to obtain a person’s TIN and other personal information to report the amount received. Therefore, they require completed W9s.

W9s forms apply to United States’ residents and those with permanent work Visas. If a person does not meet one of these classifications, they qualify as a non-U.S. person (often called a nonresident alien). Those with this classification will need to fill out a W8 form instead of a W9.

How Do You Fill Out and Submit a W9 Form?

W9 Form

image: irs.gov
The W9 form is available for download on the IRS site. The form is quite short and does not even fill an entire page if you exclude the instructions. It asks for the following information on the corresponding lines:
  1. Full name
  2. Business name if any
  3. Federal tax classification
  4. This line is for businesses with certain exemptions to fill out and should be left blank
  5. Street address
  6. City, state, and ZIP code
  7. Account number

There are also two more parts. The first asks for the contractor’s TIN (usually a person’s social security number) or their employer number. The second indicates where to sign and date the form to verify that you provided accurate information. Keep in mind that this is a legal document and should be treated as such.

Limited Liability Companies (LLCs) have special rules for filling out the federal classification and identification number sections. If one LLC owns another LLC, you must check the box labeled “limited liability company.”

If a single person owns the LLC, list the owner’s name on the name line and LLC’s name on the business line. While you can use either the owner’s social security number or the LLC’s federal employee identification number, the IRS prefers the owner’s social security number.

If you are separate from the LLC’s status, list the LLC name and its federal employee identification number. Do not check the box labeled “limited liability company.” Instead, check the box that corresponds with your classification:

  • Partnership
  • S corporation
  • C corporation

To submit the W9, the independent contractor must return the form to the business they will work for. The information provided by contractors is sensitive and can be used to steal someone’s identity. As a business, make sure to inform the contractor how, when, and why you are sending the W9 and the best way to return it to you. To protect their information, encourage contractors to use an encrypted email attachment or ask for hand delivery if they send it by mail.

How Does a W9 Compare with Similar Forms?

Various forms abound during tax season, and it’s easy to mix them up. This guide should help you wade through these differences.

W9s vs W2s

W9s should not be confused with W2 forms. Companies send W2s to employees to give them the information they need to file their taxes. W2s detail how much money the company took out of the employee’s paycheck throughout the year for taxes, benefits, Social Security or TIN, and other reasons. W2s and 1099s have similar purposes. The difference is that W2s are issued to employees who have withholdings, while 1099s are issued to nonemployees who have no withholdings.

The IRS uses 1099 and  W9 forms to measure whether a worker classifies as an employee or nonemployee. When businesses are trying to save money on benefits, they will increasingly want to classify their workers as independent contractors. However, the process of hiring an independent contractor instead of an employee must include:

  • Putting a work contract in place
  • Paying a bill through accounts payable
  • Using a W9 form
  • Servicing of other clients by the contractor
  • No training or performance monitoring
  • Not performing a core business function
  • Receiving a 1099 form
  • Not receiving benefits such as health insurance

W9s vs. W4s

W9s share similarities with W4 forms. While businesses give W9s to nonemployees to gather personal information, they give W4s to employees to gain much of the same information. However, W4 forms include information that helps companies determine how much of an employee’s paycheck to withhold. On the other hand, W9 nonemployees have no withholdings. W9s assist the company in completing 1099 forms. W4s provide information for W2 forms.

With the above information, you are prepared to complete the proper forms for your circumstances. While W9 forms are straightforward, other forms can take a lot of time and effort to fill out. Seeking the help of tax professionals can lift some of your burdens as a business professional, leaving you time for running your business efficiently.

Image: Depositphotos

This article, "W9 Form Basics for Small Business Owners" was first published on Small Business Trends



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