Taxes and payments give you so many acronyms, forms, and processes to keep track of. While some may slip off the radar from time to time, one form you don’t want to forget is the W-9. This simple form takes only a minute to complete, but has big ramifications for your business. Whether you are paying or receiving funds, form W-9 is important to your business payments and taxes. Here is everything you need to know to decide if you should prepare a W-9 for payments, or ask for one from your vendors.
What is a W-9?
Form W-9 is an Internal Revenue Service form used to verify and certify that you are working with a legitimate business that is paying its taxes.
The basic information on a W-9 includes;
- Vendor’s business name (or personal name if a sole proprietor).
- Type of business.
- Business employer identification number (EIN) or social security number.
- A signature.
The client business uses this information for payment and tax reporting when required. For my freelance writing business, I keep an updated copy of my W-9 saved in my Dropbox so I can quickly send it off to new clients coming on board.
The $600 Rule
A W-9 form is not required for all business transactions. For example, if you go into a store and spend money, you don’t need to get a W-9 from the store to ensure they are paying their taxes. In general, W-9s are required only for business-to-business relationships where more than $600 is paid in the calendar year. The $600 rule applies to labor and services. For direct sales, a W-9 is required for total purchases over $5,000.
For example, if you are hire a contractor to work on a project for you with a $500 budget, you technically do not need a W-9 for that contractor because they are being paid less than $600. However, if you are going to pay the contractor $1,000, you do need a W-9. A contractor paid more than the $600 reporting requirement for the year.
While these are the requirements for when you are required to get a W-9, it is not a bad idea to get one from every vendor. If you do cross the $600 line, you don’t want to have to go back to the vendor for forms. Instead, getting the W-9 for every vendor ensures you are 100% compliant.
These rules are related to 1099 reporting requirements. If you spend more than $600 with a vendor, you are required to report the payments via form 1099 to the IRS. A 1099 requires the information on a W-9 to complete. So the two forms go hand in hand for the vendor-tax relationship lifecycle.
Preparing a W-9 for your business
Let’s flip to the other side of the coin and look at transactions where you are the vendor. After all, you are in business to make money, not just spend it! When you are a vendor, you should be ready to provide a W-9 on demand. This is where that Dropbox trick comes in handy.
To complete a W-9, download a blank copy of the form from the IRS website. The form is updated periodically, so make sure you get the latest version from the IRS to stay compliant. I once sent an old version of form W-9 to a client. I was requested to send an update with the latest version of the form.
As a sole proprietor;
- Fill out your name
- Contact information.
- Social security number.
- Sign and you are good to go.
For a business;
- Replace your personal contact information and social security number with your business contact information and EIN.
If you are concerned about giving out your social security number and personal contact information, you can register as a business to avoid sending out personal details. Either option is equally acceptable, though a registered LLC or S-Corp looks a little more professional on a W-9 than a sole proprietorship.
You can use the same form multiple times. Rather than sending off an original make copies, scan a digital version. This will help you send it digitally when requested.
When to ask for a W-9
As a business owner, you now know about the $600 rule for getting W-9 forms, but should you cast a wider net and get a W-9 from every vendor? That is up to you.
I am a serial entrepreneur with several businesses behind me. One of which was a party and event planning business in Denver. For one event, we worked with a shuttle service to safely drive party guests to and from our big holiday bash.
After a few interactions with the shuttle driver, I became concerned he was not doing everything on the up-and-up as far as taxes and regulations, but we were too far in to switch vendors. To ensure we were covered, even though we were paying the company less than the $600 requirement, I made sure to get a W-9 before the event to ensure we were paying a legal business. He pushed back on the requirement, but eventually relented and gave us that all important form.
While you probably have enough to keep you busy on your plate, the best choice is to get a 1099 form from every single vendor. Alternately, you can use a vendor payment system where they customer enters W-9 information as part of the vendor on-boarding process. It is up to you, but I would err on the side of getting a W-9 for every vendor, not just when required.
When in doubt, use the form
Both sides of the transaction have motivation to complete and W-9 for every vendor relationship. As a customer, the W-9 protects you from paying illegal vendors and possible implications with money laundering, tax evasion, or worse. As a service provider, the W-9 tells your client you are an upstanding business that is safe to pay.
Just like when I was working with a sketchy shuttle driver in Denver, you should always follow your gut when it comes to W-9 forms. You don’t want to get to 1099 season and run into trouble. So take the steps to prepare ahead of time by sending W-9s when needed. Next, request them for every new vendor. If you do, you’ll stay on the right side of the law at tax time. Not to mention your business can pay your vendors without worry. That’s something any business owner can get on board with.