A W-9 form is an Internal Revenue Service tax form that signals the taxpayer is not subject to backup withholding, and is responsible for paying his or her own taxes. The W-9 form is helpful as a guide in completing a contractor's tax obligations for the calendar year, either with the aid of a tax accountant or by the contractor.
Companies that use independent contractors don't withhold any income taxes, Social Security taxes, or Medicare taxes, as do regular employers -- it's up to the individual contractor to meet those IRS tax obligations. Uncle Sam will, however, require companies who use contractors to submit a 1099-MISC tax form to match independent contractors tax filings with their annual tax income.
What is a W-9 Form?
W-9 forms are generally used by independent contractors, and not by full-time employees, to complete their tax forms and to fulfill their taxable obligations to Uncle Sam. Unlike full-time and part-time employees, independent contractors don't have taxes deducted for payments for business services rendered to clients -- usually corporations, small-to-midsize companies, non-profits and other business-oriented organizations.
For example, a major financial institution could hire a freelance designer to create a new website for the price of $5,000. When the work is complete and the designer's invoice is submitted, the financial institution pays the designer the full $5,000, without any taxes taken out. Instead, it's up to the designer to pay his or her own taxes from the $5,000, usually on a quarterly basis. Every year, the sum of that designer's professional earnings is recorded on the W-9 tax form and submitted to the IRS.
Data provided on a W-9 form comes from IRS tax form 1099, which lists any income paid out to an individual that otherwise would be recorded on an IRS W-2 tax form. To accurately complete a 1099 tax form, a client entity must include the payee's name, address, Social Security number and tax I.D. number, before submitting it to the IRS.
Who Needs to Complete a W-9 Form?
It's not just independent contractors who may be subject to a W-9 tax form.
Any income earned on specific real estate transactions, mortgage interest paid by an individual and dividends paid out to shareholders, for example, need to be listed on an IRS W-9 tax form. In general, a 1099 tax form is only required for payments exceeding $600 for the 2018 tax year. Any income under $600 still must be included on an individual's annual tax forms, but doesn't have to be listed on a 1099 tax form.
Here's a short list of common candidates for a W-9 Form:
Otherwise known as "gig" workers, freelancers take on short-term project for clients -- like a writer creating a brochure for a company or a web designer handling digital web work for a client. Freelancers commonly provide W-9 forms to clients to fulfill tax obligations.
2. Professional consultants
Consultants often handle business advisory services for clients and take more of a "big picture" role compared to task-oriented freelancers. Consultants may advise on specific company interest and areas, like marketing, sales, finance, and information technology, and they fulfill their tax obligations via W-9 forms.
3. Trade workers
Professional trade workers, like a landscaper, plumber, or electrician may also rely on W-9 forms for their taxes, depending on how they structure their services from a tax standpoint.
4. Some corporations and LLCs
Most corporate contractors aren't required by the IRS to file W-9 forms, as they don't typically receive a 1099 form. Yet some corporate contractors -- specifically limited liability company (LLC) contractors, require a W-9 form in the event they file as an individual entity -- and not as a corporation.
Three Key Terms Associated with W-9 Forms
Accountants and the IRS certainly are up to speed on the terms used to describe W-9 forms, but taxpayers may not be. Here are some good W-9 terms to know:
1. Backup withholding
This tax term describes the amount of income held back from a taxpayer's payments, usually from an employer as a full-time employee. In essence, backup withholding is the percentage of estimated taxes due to the government held from a paycheck.
2. Independent contractor
An independent contractor is a self-employed individual, like a doctor, freelance writer, or consultant, who provides professional services to clients or to a third-party company or organization on behalf of a client. An independent contractor's professional earnings are subject to self-employment tax.
To be officially deemed an independent contractor by the IRS, an individual must meet three conditions:
- The person is professionally free from control by a client.
- The person makes his or her own decisions and otherwise controls their professional services provided to a client.
- The person is responsible for the end result or outcome of a service or product provided to a client.
3. Taxpayer Identification Number (TIN) and Certification Form
A company or organization that needs to file tax-related forms to the IRS, such as Form 1099, will list annual income paid to a contractor. To do so accurately, they'll require the contractor's Taxpayer Identification Number (TIN) to report any earnings paid out to that contractor over the course of a calendar year.
TIN vs. Social Security Number
There are several key distinctions between a Taxpayer Identification Number and a Social Security number:
A TIN's main objective is to separate one independent contractor or small business from another one -- each gets its own TIN, which is used to identify the enterprise clearly to the IRS. The independent contractor can use its TIN to file taxes to the IRS.
While TINs and Social Security numbers both have nine digits, there is a key difference. A Social Security number signifies the tax identification number for an individual, while an Employer Identification Number (EIN), or TIN, identifies a business entity.
For business purposes, a tax identification number is used for non-direct IRS purposes. For instance, a bank or financial institution may require a TIN to open up a business account. Or a business partner or supplier may need a TIN to open an account with an independent contractor or small business.
How to Submit an IRS W-9 Tax Form in Six Steps
Basically, anyone who needs to file a W-9 form will receive that form from a client before they undertake any professional or business services.
Completing a W-9 tax form is simple, but it's important to get it right:
- List your name at the top of the form. Make sure to list your full name and that your name matches the exact spelling on any tax forms submitted to the IRS.
- List your business name. There's a separate line to list your business name. If you don't have a business name, leave that line blank.
- Write your tax classification. The IRS includes this all-important line to categorize your tax status. In general, you can list yourself as a sole proprietor, single-member LLC, or as an individual, although the IRS does allow you to register as a C corporation, S corporation, Partnership and as a trust/estate business.
- Make sure to include your residential data. The IRS requires W-9 filers to include their address, including street name and number -- and apartment number, if needed.
- Include your TIN or social security number. In this section, the IRS requires you to include either your Social Security number or employer identification number. Usually, for most independent contractors, all that's required on this line is your Social Security number.
- Sign your name. When you complete your W-9 form, sign your name and include the date. The IRS will note your signature and view it as a declaration that you've verified all the information included on your W-9 form.
Key Tips When Filing Your W-9 Form
There are several steps you can take to improve your W-9 filing experience:
- Keep it safe. Past filling your W-9 form out accurately, job one is to protect your identity from would-be fraudsters. In that regard, always keep your W-9 form private, and don't leave it in a public place or transmit it to a company or an accountant, for example, in an unsecured way. Tax form fraud is all too real and you need to make securing your W-9 form a top priority.
- Keep your form up-to-date. If you move, change your business name, get married and change your name, or otherwise make any big business-oriented changes to your life, remember to update your W-9 form.
- Be accurate. The IRS is serious about accurate W-9 forms. If, for whatever reason, you submit a form with falsified information, you leave yourself open to prosecution and heavy penalties -- even imprisonment.
If you have any questions at all about your W-9 form, contact a seasoned tax accountant who can walk you through the process. It might cost $100 or more, but filing your W-9 form accurately and safely is usually worth the cost.