What is a W-9?
When a business hires an independent contractor (e.g. accountant, attorney), the IRS mandates that a W-9, Request for Taxpayer Identification Number and Certification, be completed. In the best interest of the employer, the independent contractor should fill out the W-9 rather than the employer because it asks for several personal items that only the independent contractor can answer, such as their: social security number, taxpayer identification number, and certification, business name, the type of business entity, etc.
Upon completion of the W-9, it is not required to be submitted to the IRS by either the business or the independent contractor. Instead, the W-9 should be kept in the business files for four years in the event the IRS has any questions regarding the form. The W-9 is also helpful for the business when later completing its W-2 and if necessary the 1099-MISC.
It is important to remember that a W-9 is different than a W-4. A W-4 is used when hiring employees, which requires the business to withhold taxes and to pay Medicare/Social Security taxes.
What is a 1099?
Form 1099-MISC is only required when the business (payer) makes payments to the independent contractor that exceed $600 throughout the tax year. After completing the 1099, two more steps are required:
(1) a copy of the completed form must be provided to the independent contractor by January 31 of the year following payment; and
(2) a copy of the 1099 must be sent to the IRS by January 31.
Failure to complete and submit Form 1099 to the IRS by the January 31 deadline will result in a minimum penalty of $50.00 per form. Visit the IRS for more details regarding possible penalties.
Which payments do not require a 1099?
The IRS specifies certain payments that are not required to be reported on Form 1099-MISC:
- Payments made to a corporation (including limited liability companies that are treated as a C or S corporation)
- Payments for merchandise, telegrams, telephone, freight, storage (and similar items)
- Payments of rent to real estate agents (but, the real estate agent must report the rent paid to the property owner on Form 1099-MISC)
- Wages paid to employees, as they are reported on Form W-2
- Military differential wage payments made to employees while they are on active duty in the Armed Forces or other uniformed services
- Business travel allowances paid to employees, as they may be reported on the W-2
- Cost of current life insurance protection
- Payments to a tax-exempt organization including tax-exempt trusts, the United States, a state, the District of Columbia, a U.S. possession, or a foreign government
- Payments made to or for homeowners from the HFA Hardest Hit Fund or similar state program
- Compensation for injuries or sickness by the Department of Justice as a public safety officer disability or survivor’s benefit, or under a state program that provides benefits for surviving dependents of a public safety officer who has died as the direct and proximate result of a personal injury sustained in the line of duty
- Compensation for wrongful incarceration for any criminal offense for which there was a conviction under federal or state law
What penalties associated with failing to comply with the W-9 requirements?
There are penalties associated with failing to fill out a W-9 or falsifying information contained within the form. If you hire an independent contractor but fail to submit the accompanying Form 1099 to the IRS, you will be penalized $50 per instance and may also be subject to backup withholding. Backup withholding allows for the payor to withhold 28 percent of the check with the proceeds being forwarded to the IRS. If backup withholding does not apply, then you may be penalized $500 per incident. Lastly, if you falsify any information or misuse any confidential information, you will be subject to criminal and civil penalties.
This Blog was written by the Hunter Business Law Team
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