A W-9 is a tax form that informs the IRS that a taxpayer is not subject to backup withholding, and is responsible for paying his or her own taxes. A W-9 is helpful when completing a vendor's tax obligations for the calendar year, either with the aid of an accountant or on your own. But, what do you do when a vendor doesn’t supply you with a W-9?
Avoiding the Problem
As a business owner, the best course of action to prevent the problem of vendors refusing to provide their W-9 is to be proactive in the approach. When hiring a contractor, freelancer or vendor it is always best to have them fill out a W-9 before beginning any work or issuing their first payment.
Filing 1099 Forms
When a company or individual fails to provide you with the required W-9 information needed, you must still submit the required 1099 forms. Upon completion, you can either leave the TIN/SSN field blank or write “Refused to Provide.” The IRS will then send a notice requiring you to begin the backup withholding with a CP-2100 or CP-2100A letter. Please note you are required by the IRS to make at least three attempts to obtain the information and document all attempts for your records to avoid penalties from the IRS.
Responsibilities and Penalties for Both Parties
Payor
Required by the IRS to obtain a W-9 from Vendors, Contractors or Freelancers as per the W-9 and 1099 Rules.
Required to submit 1099 forms on time as per the stated deadlines. Failure to file 1099s based on the refusal to provide a W-9 does not excuse the business from timely filing and could result in penalties.
Required to document all attempts requesting the W-9 information from the Payee (a minimum of three attempts are needed to avoid IRS penalties).
The payor is expected to begin withholding federal taxes at a rate of 24% (effective 1/1/2018) to ensure the appropriate taxes withheld for work completed and then remitted to the IRS. These funds help the IRS find and tax independent contractors who don’t report income.
Penalties
Misuse of TINs or SSNs – If a business misuses or improperly discloses a TIN or SSN provided on a W9 this violates federal law and the company may be subject to civil and criminal penalties.
Not Filing 1099s Timely or Filing Incorrect Information – Penalty rates vary based on the size of a business and the time when correct information is received. Fines range between $50 to $530 per 1099.
Payee (VENDOR, CONTRACTOR OR FREELANCER)
The vendor is required by the IRS to provide a W-9 with accurate and complete information to the payor, who will then submit the information to the IRS for withholdings.
Penalties
Providing False Information – If a payee provides false information this is a violation of the law, and the payee may be subject to criminal penalties, fines or imprisonment.
Failure to Provide W-9 – If a vendor or contractor refuses to provide a W-9 when its requested the Payee is subject to a penalty of $50 for each such failure.
Backup Withholding – A payee providing false or inaccurate information or refusing to grant a W-9 when requested are subject to backup withholdings on all future payments at the rate of 24% (effective 1/1/2018). Funds withheld are sent to the IRS and help the IRS identify those who don’t report income.
Overall, it is essential that proactive measures are taken going forward to obtain W-9s before the contractor begins work or before they receive their first payment to prevent future issues. It is also essential to document all requests and communication with the Payee refusing to provide their W-9 to avoid penalties. Last, but not least, it is required to report all information and submit 1099s on time to avoid penalties on your part as a business.
As a part of our Accounts Payable & Bill Payment services to all our customers we work with vendors and contractors to obtain W-9 information and filing 1099s. If you have questions as to how Basis 365 can assist your business with these tasks, reach out to learn more.
