Form W-9 has become increasingly important as more businesses and individuals have turned to freelance and contract work. Current projections predict that nearly 86 million Americans will work as freelancers or contractors in the US by 2027. This increase in contracting has resulted in a larger number of payments from businesses to individuals who are not employees and a corresponding increase in the number of W-9 forms filed.
For businesses that work with contractors or any professionals who work outside the context of full-time employment, W-9s are likely a familiar part of doing business. Every year, payers (such as employers or financial institutions) file millions of W-9s requesting tax identification numbers (TINs) from payees (such as workers or investors), underscoring the importance of this tax form—and the need to fill out this document accurately and completely.
Here is an overview of what you need to know about the different uses and requirements of Form W-9, best practices for completing and filing the form in compliance with IRS regulations, and how Stripe helps businesses handle W-9s and other important tax forms.
What’s in this article?
- What is Form W-9?
- Uses for Form W-9
- Who is responsible for Form W-9?
- Information required on Form W-9
- Penalties for an incomplete or noncompliant Form W-9
- Backup withholding
- How to properly and securely complete Form W-9
What is Form W-9?
When a business or individual hires a contractor or vendor for services, they are required to obtain a completed Form W-9 from the contractor or vendor before issuing any payments. This IRS tax form collects the recipient’s name, address, and TIN, which might be a social security number (SSN) for individuals or an employer identification number (EIN) for businesses. Payers use this information to accurately report payments made to the recipient on Form 1099, report these payments to the IRS, and comply with various tax and regulatory requirements.
Financial institutions also use Form W-9 to comply with the IRS’s Know Your Customer (KYC) rules. Financial institutions are required to get a TIN from customers before they open an account, and Form W-9 is often used for this purpose.
Uses for Form W-9
Form W-9 is an important tax form that payers use in a variety of situations where a TIN is required for tax reporting and compliance purposes. Some of the common uses for Form W-9 include:
Reporting Form 1099-INT
Payers use Form 1099-INT to report interest income paid to an individual or entity. When a business or individual pays interest to someone, they are required to obtain a completed Form W-9 from the recipient in order to report the interest income to the IRS on Form 1099-INT.Reporting Form 1099-DIV
Payers use Form 1099-DIV to report dividend income paid to an individual or entity. When a business or individual pays dividends to someone, they are required to obtain a completed Form W-9 from the recipient in order to report the dividend income to the IRS on Form 1099-DIV.Reporting Form 1099-B
Brokerage firms use Form 1099-B to report sales of stocks, bonds, and other securities. When a customer sells securities, the brokerage firm is required to obtain a completed Form W-9 from the recipient in order to report the sale and any capital gains or losses on Form 1099-B.Compliance with KYC rules
Financial institutions, such as banks and brokerages, are required to obtain a TIN from customers before opening their account. Form W-9 is often used for this purpose, as it provides the necessary information to comply with KYC rules.Compliance with backup withholding rules
Backup withholding is a tax withholding requirement that applies to certain payments—such as interest, dividends, and other reportable payments—made to taxpayers who do not provide a valid TIN. When a payer is required to withhold taxes under backup withholding rules, they are required to get a completed Form W-9 from the recipient to ensure they have the correct TIN and avoid potential penalties.
Who is responsible for Form W-9?
Payers typically request a W-9 form when they need to obtain the TIN of an individual or entity for tax reporting purposes. The payer may be an individual, a business, a government agency, or a financial institution, depending on the specific situation.
The payer is required to request a completed Form W-9 from the recipient before issuing any payments, if the payments are reportable to the IRS. For example, if a business hires a contractor to perform services and pays the contractor more than $600 during the year, the business is required to report those payments to the IRS on Form 1099-MISC. To do so, the business must get a completed Form W-9 from the contractor to capture the contractor’s TIN.
Individuals and entities that receive payments that are reportable to the IRS are required to complete a Form W-9, if requested by the payer. This includes independent contractors, freelancers, vendors, and other service providers who receive payments from businesses or individuals.
Information required on Form W-9
As with most tax forms, it’s important for payees to fill out Form W-9 completely and accurately. Completing and verifying the information requested by Form W-9 is important for ensuring accurate tax reporting and compliance, for both the payer and the contractor or vendor. When a contractor or vendor completes Form W-9 for a payer, they should provide the following information:
Name: The contractor or vendor should provide their full legal name as it appears on their tax return.
Business name (if applicable): If the contractor or vendor operates a business, they should provide the business name.
Federal tax classification: The contractor or vendor should indicate their federal tax classification, which may be an individual, sole proprietorship, partnership, C corporation, S corporation, trust/estate, or other entity.
Exemptions: If the contractor or vendor is exempt from backup withholding or Foreign Account Tax Compliance Act reporting, they should indicate this and provide the reason for the exemption.
Address: The contractor or vendor should provide their mailing address.
Account numbers: If the contractor or vendor has an account number with the company, they may provide this information. However, this is not required.
Taxpayer identification number (TIN): The most important information that the contractor or vendor must provide on Form W-9 is their TIN. This might be an SSN for an individual or an EIN for businesses.
When a payer receives a completed Form W-9 from a contractor or vendor, they should check that all information has been provided.
Penalties for an incomplete or noncompliant Form W-9
There are several penalties that the IRS can impose if a taxpayer fails to comply with tax laws. These compliance issues include not completing or properly filing a required tax form. Here are some of the most common penalties, which can become more expensive depending on the severity and duration of the noncompliance:
Failure to File Penalty: If a taxpayer fails to file a required tax return by the due date (including extensions), the IRS can impose a penalty of 5% of the unpaid tax amount for each month or partial month that the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for returns that are more than 60 days late is either $435 or 100% of the unpaid tax, whichever is less.
Failure to Pay Penalty: If a taxpayer fails to pay the full amount of tax owed by the due date (including extensions), the IRS can impose a penalty of 0.5% of the unpaid tax amount for each month or partial month that the tax is late, up to a maximum of 25% of the unpaid tax.
Accuracy-Related Penalty: If a taxpayer understates the amount of tax owed on a tax return and the understatement is due to negligence, disregard of rules or regulations, or a substantial understatement of income, the IRS can impose an accuracy-related penalty of 20% of the understatement.
Fraud Penalty: If a taxpayer willfully files a false or fraudulent tax return, the IRS can impose a penalty of 75% of the unpaid tax.
Late Payment Penalty: If a taxpayer files a tax return on time but fails to pay the full amount of tax owed by the due date (including extensions), the IRS can impose a late payment penalty of 0.5% of the unpaid tax amount for each month or partial month that the tax is late, up to a maximum of 25% of the unpaid tax.
Trust Fund Recovery Penalty: If a business neglects to withhold and pay payroll taxes, the IRS can impose a trust fund recovery penalty equal to 100% of the unpaid tax amount.
These penalties can add up quickly, and interest can also accrue on unpaid tax amounts, making the total amount owed much higher over time. It’s important to comply with tax laws and file accurate and on-time tax returns to avoid these penalties and other consequences.
Backup withholding
Backup withholding is a tax collection method used by the IRS to ensure that taxes are paid on certain types of income, even if the recipient fails to report the income on their tax return or provides incorrect information. Under backup withholding, a payer is required to withhold a flat rate of 24% from certain types of payments made to a payee and remit that amount to the IRS. The withheld amount is then credited against the payee’s income tax liability when they file their tax return.
A payee may be subject to backup withholding if they fail to provide a valid TIN when required, provide an incorrect TIN, or fail to report certain types of income on their tax return.
Examples of payments that may be subject to backup withholding include:
- Interest, dividends, and other types of investment income
- Payments made to independent contractors or freelancers
- Rent payments made to nonresident aliens
- Certain payments made to attorneys or other legal professionals
It’s important for payees to provide accurate, up-to-date information to the payer to avoid backup withholding. If a payee believes they are being subjected to backup withholding in error, they should contact the payer to resolve the issue and provide any necessary documentation to correct the situation.
How to properly and securely complete Form W-9
W-9s, like most tax forms, leave little room for error. Since this form is so important for both payers and payees during tax season, it’s worth taking the time to ensure the form is filled out exactly as it needs to be. Fortunately, it’s a fairly straightforward process. Here are some tips on correctly filling out a W-9 form:
Understand the purpose of the form
The payer uses Form W-9 to report payments made to you to the IRS. Make sure you understand the purpose of the form and how it affects your tax reporting obligations.Provide accurate information
Double-check all of the information you provide on the form to ensure that it is accurate and up-to-date. Any errors or discrepancies can delay the processing of your payment and may result in backup withholding.Use your correct legal name
Make sure that the name you provide on the form matches the name on file with the Social Security Administration (SSA) or the IRS. If you have recently changed your name, due to marriage or other reasons, update your information with the SSA before filling out the form.Provide your TIN
The most important piece of information on the W-9 form is your TIN, which can be your SSN or EIN. Make sure to provide the correct TIN to avoid backup withholding.
Stripe Tax is a solution that can help businesses streamline their taxes by automatically calculating and collecting taxes from customers, including sales tax, VAT, and GST. Stripe Tax can also provide businesses with tax forms, such as W-9 and 1099 forms, to help them comply with tax reporting requirements.
If you are a business owner using Stripe to collect payments from customers, it’s important to ensure that you have collected a completed W-9 form from any vendors or contractors you pay using Stripe. Stripe Tax can help automate this process by sending out requests for W-9 forms and collecting the necessary information directly from vendors. To learn more, start here.