The dreaded end-of-year tax hustle doesn’t have to be so dreaded! With the right processes in place throughout the year, preparing and issuing your organization’s annual 1099 forms can be a breeze.
So, what are W-9s and why are they so important to this process? A W-9 - also known as a Request for Taxpayer Identification Number and Certification form - is an Internal Revenue Service tax form that is used to confirm a vendor’s name, address, federal tax classification (individual, corporation, LLC, etc.) and Taxpayer Identification Number (Social Security Number or Employer ID Number). The W-9 form is used by your organization to generate a 1099 at the end of the year. A 1099 is an informational return used to report taxable income to the IRS.
To ensure compliance with IRS information reporting regulations, organizations must have a strong year-round vendor payment process in place. Waiting until year-end to determine compliance is often difficult, and it can be nearly impossible to obtain missing W-9s from a vendor or get incorrect W-9 forms revised at the last minute. Failure to plan ahead can cause an unnecessary year-end rush and may come with costly consequences. If your vendor payment process is audited by the IRS, it does not take much for penalties and backup withholding assessments to add up. IRS penalties for not filing the required 1099 forms can be as high as $550 per form. This can double if the form wasn’t sent to the vendor nor the IRS. These penalties are assessed for each 1099 form not filed.
The IRS recommends requesting a W-9 prior to the first payment being made to a vendor. Providing a W-9 does not mean that vendor will receive a 1099 at the end of the year. There are several criteria that must be met in order to receive a 1099. The IRS recommends getting a W-9 from every vendor regardless. If the vendor does not provide the W-9 form, according to IRS regulations you are required to withhold backup withholding of 24%. If this is not done, the IRS could hold your organization responsible for paying the 24% backup withholding that was not properly withheld. Once you obtain a vendor’s W-9 you are no longer responsible for backup withholding unless the IRS or vendor has notified you directly to withhold.
Now that we’ve gone over the purpose of W-9s and 1099s, let’s discuss how you can set up an IRS-compliant vendor payment process. There are several simple steps you can take throughout the year to ensure IRS compliance and make it easier to issue 1099 forms.
4 Steps for a Strong Vendor Payment Process
Obtain a W-9 form before paying the vendor.
Once you receive the vendor’s W-9, review the form to ensure all information is complete and the form has been signed and dated by the vendor.
Update the vendor record within your accounting system to include information from their W-9, such as their Employer ID Number (EIN) or Social Security Number (SSN).
Save the signed W-9 form in a secure, permanent, and easily accessible location. We recommend storing all vendor W-9s in one central location to streamline your preparation of 1099 forms at year-end.
It’s also a good idea to note the name and contact information of the individual who submitted the W-9 to you. In the event of an IRS audit, you may need to show how and from whom you obtained that W-9 form. This is important to prove to the IRS that the form is valid, and also to provide a direct contact for any questions related to the W-9 form.
Remember, not all payments need to be reported on a 1099 form. For example, payments made to corporations are not generally required to be reported on a Form 1099. However, it can be difficult or impossible to determine whether a payment is 1099-reportable until you obtain the vendor’s W-9 form. After you obtain their W-9, you can determine the reportability of the payment.
Payments to Foreign Vendors
W-9 forms are used by U.S.-based vendors. If your organization is making a payment to a foreign-owned company outside of the United States, the IRS requires you to obtain alternative documentation prior to payment.
The IRS forms used for foreign vendors are:
Form W8-BEN – This form is filled out by foreign individuals (nonresident aliens) who are receiving non-service-related payments such as dividends, interest, royalties, annuities, and rents.
Form W-8 BEN-E – This form is filled out by foreign entities or entities with foreign subsidiaries (businesses only).
Form 8233- This form is filled out by foreign individuals (nonresident aliens) who are receiving compensation for personal services.
In today’s global environment, it’s often difficult to determine whether a vendor is established in the United States or in a foreign country. By obtaining these forms early on in the payment process, you’ll all have the information you need to fulfill your organization’s responsibilities.
In the end, don’t make assumptions! Obtain the proper documentation for all vendors, every time. With a good year-round process in place, you’ll not only ensure IRS compliance, but also prevent stress and headaches when it’s time to issue your organization’s annual Form 1099s.