You’re probably familiar with the process of onboarding new employees in the United States. After salary negotiations have come to a close and the candidates have agreed to work for your company, they fill out a Form W-4, providing copies of their identification and proof of the right to work in the U.S. With independent contractors or self-employed individuals, it’s a different process. You don’t need to withhold taxes from them, nor do you require proof of citizenship or the right to work.
If your company hires people on a 1099 basis, these individuals will complete a form W-9 before they begin doing any work. The form provides your company with the individual’s taxpayer information, so you can submit the details of your payments to the Internal Revenue Service (IRS). Learn more about what a W-9 form is, what it’s used for, and how to have independent contractors fill one out.
Who needs a W-9 form?
Form W-9 is also called “Request for Taxpayer Information.” Anyone who needs to provide details about their tax identification number (TIN) and mailing address needs to submit the form. Although the form comes from the IRS and is used to collect taxpayer information, you don’t submit the form to the IRS. Instead, your company keeps it on file and uses it to fill out any informational tax forms, such as Form 1099-NEC.
There are four circumstances during which a company might collect a W-9 from an individual:
- It has hired a contractor: Perhaps the most common use of the W-9 tax form is to collect information about a freelancer, independent contractor, or self-employed individual your company just hired. For example, if you hire freelancers to work on a graphic design project or bring on self-employed business consultants, your company can ask them to provide you with a completed W-9 form before they begin work.
- It’s a bank, and a customer opens a new account: Banks often need to submit information to the IRS about their customers, such as the amount of interest earned during the year. For that reason, a bank might request a W-9 from a new customer. Some banks don’t request the form but do ask customers to provide information, such as their Social Security number (SSN), when they open an account.
- It has canceled a debt: If a person has a loan with a lender and the lender cancels the debt, the canceled debt is often considered taxable income. The lender will need to provide information to the IRS, which will likely ask the person to submit Form W-9 to provide that information.
- It’s an investment firm: Similarly to banks, investment firms will often request a Form W-9 from clients so it can provide the IRS with details about any dividends or gains earned by the investor.
The odds are likely that the reason your company will need to collect a W-9 is that you’ve hired a contractor. Contractors work independently and aren’t the same as your employees. If you hire workers and have them fill out a W-4 and provide them with a W-2 at the end of the year, they don’t need to submit a W-9. Also, your company technically only needs to collect a W-9 from contractors you pay more than US$600 in a year. If you hire people for a small, one-off project and their fee is less than US$600, you don’t need to provide them with a Form 1099 and don’t have to collect a W-9 from them.
What is on a W-9 form?
The W-9 is used to collect taxpayer information. It will give your company all the details you would need to complete a Form 1099 or another information return for the IRS. The sections on the W-9 are:
- Contact information: Individuals filling out a W-9 provide their basic contact information, including their name and address, on the top part of the form.
- TIN: A TIN can be a person’s SSN or a company’s Employer Identification Number (EIN) if it is a small company that also employs people. People who live in the U.S. but don’t have an SSN can provide an individual TIN in this section.
- Certification: The certification section is where a person signs to verify that the information on the form is true and correct.
Some terms on the W-9 form might not be familiar to you or the average independent contractor. For example, W-9 forms for independent contractors ask individuals to certify that they aren’t subject to backup withholding or are exempt from it.
Backup withholding means that a payer, in this case, your company, needs to withhold tax from the payments you make to a contractor. The backup withholding rate is currently 24 percent. Backup withholding is typically required when a person uses the wrong TIN or underreports certain types of payments.
While individuals usually can’t claim an exemption from backup withholding, some types of corporations or entities can. If workers are completing a W-9 on behalf of an entity, they have the option of claiming exemptions on Line 4 at the top of the form.
How to fill out a W-9 form
Filling out a W-9 is a fairly straightforward process, as the form asks for information that a taxpayer should have readily available. Here’s how to fill out a W-9:
Line 1 and 2
Line 1 on Form W-9 asks for the taxpayer’s name, as it appears on the individual’s tax return. If self-employed individuals or sole proprietors are completing the form, filling out line 1 is simple: They just have to put their name on the line as it appears on their tax return.
If a person is filling out the form for a partnership, limited liability company (LLC) or another type of corporation, the individual should put the name of the legal entity on line 1.
Line 2 is where people put their business name if they have one. For example, a partnership or single-member LLC would put its “doing business as” name here.
Individuals filling out the W-9 need to check a box that states what type of company they are operating. The options include:
- Individual, sole proprietorship, or single-member LLC
- C corporation
- S corporation
- Trust or estate
- Limited liability company
The type of business entity should correspond to how individuals have organized their company. For example, sole proprietors are individuals who haven’t filed any articles of incorporation and who use their SSN as their TIN. A limited liability company is usually made up of multiple members. If the company is unincorporated but more than one person has ownership shares, it’s likely a partnership.
You might assume that the people you hire as independent contractors are all going to be sole proprietors. But some of them may have incorporated or formed single-member LLCs.
Some payees are exempt from backup withholding. If that’s the case, they need to put the exemption code on line 4. Individuals and sole proprietors are usually not exempt from backup withholding and shouldn’t put any codes in this section.
Line 5 and 6
Lines 5 and 6 are where individuals would enter their mailing address for any information returns the company would send them. Line 5 is for the street address, while Line 6 is for the city, state, and ZIP code. Individuals might also submit a W-9 after they’ve had a change of address. In that case, they should write “new” above Line 5 to indicate the change to the company.
Line 7 is optional and provides a place to list any account numbers associated with the taxpayer.
Part I is where individuals filling out the W-9 enter their TIN. The number to use depends on who is filling out the form. Sole proprietors can use their SSNs or their EIN if they have one. Other types of entities should use their EIN.
Some people might not have an SSN or an EIN. For example, resident aliens might not be eligible for an SSN. If that’s the case, individuals should provide their individual tax identification number (ITIN) from the IRS.
It might be the case that individuals filling out a W-9 don’t yet have a TIN. Depending on their citizenship or entity status, they can apply for a TIN and write “applied for” in Part I of the W-9. They will be subject to backup withholding until they receive their TIN and submit an updated W-9 to the payer.
The second part of the form provides a place for individuals to sign to verify that the information on the W-9 is true; that they are not subject to backup withholding; and that they are a U.S. citizen, resident alien, or an entity organized to do business in the U.S. The signature in Part II also certifies that the TIN provided is the correct one.
Difference between W-9 and W-4 tax forms
The primary difference between a W-9 tax form and a W-4 tax form is who they are for. A W-9 tax form is used for independent contractors or businesses, people or entities who will get paid by a company but aren’t employees of that company. Employees of a company use a W-4 form. People fill out a W-4 when they are first hired and might fill out an updated form as their situation and withholding needs change.
When individuals complete a W-4, they tell a company how much to withhold from their paychecks. For example, an employee with two jobs might request that a company withhold more, while a person who has many deductions might request a company to withhold less.
Since independent contractors aren’t employees and a company won’t withhold taxes for them, there’s no reason for them to fill out a W-4. A company gets all the information about employees it needs from the W-4, so it doesn’t have to ask them to fill out a W-9 as well.
How are W-9 and 1099 forms different?
When your company hires independent contractors, both Form W-9 and Form 1099 are likely to be involved at some point. The difference between the two is the origination of the form. A contractor fills out a W-9 and submits it to your company. Your company keeps it and uses the information on it when you complete Form 1099.
At the end of the tax year, your company is responsible for giving Form 1099-NEC to contractors if you paid them at least US$600. So while a W-9 comes from a contractor to you, Form 1099 comes from your company to the contractor.
Another notable difference between the forms is IRS involvement. The IRS doesn’t get a copy of a W-9. The information on the form is meant for your company. The IRS already has the details about taxpayers, so it doesn’t need another form. It does want to get copies of any Form 1099 you give to contractors, though. The agency uses the information provided on Form 1099 to make sure contractors or entities report all of the income they earned during a particular tax year.
As of tax year 2020, companies that pay independent contractors more than US$600 in a year need to file Form 1099-NEC and give the contractors a copy of that form. Before 2020, companies gave contractors a copy of Form 1099-MISC at the end of the tax year.
Is there a deadline to collect a W-9 form?
Since the IRS doesn’t collect Form W-9 and it’s more a way for your company to efficiently and accurately collect information about taxpayers, there’s no real deadline for collection. You might find it easiest to have contractors submit the form to you when they sign a contract before they begin working on a project. That way, the form won’t get lost in the mix or forgotten.
While there’s no deadline for a W-9, there is a deadline for Form 1099. Your company needs to send Form 1099-NEC to contractors by the end of January following the tax year. For that reason, you might want to have contractors send in their W-9 to you before the end of the year, so you have plenty of time to prepare Form 1099-NEC for the IRS.
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THIS INFORMATION IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Globalization Partners does not provide legal or tax advice and the information is not tailored to the specific situations of your company or your workforce. Globalization Partners makes no representations or warranties concerning the accuracy, completeness or timeliness of this information. Globalization Partners shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.