W-9 Form: What Is It And Why Do You Need To Fill One Out?
Here are frequently asked questions about the W-9. What is it used for, do I need to fill one out and can I refuse to fill out a W-9?
A W-9 form is completed by independent contractors and freelancers as a means of gathering information for the Internal Revenue Service (IRS). It's a record of your name, address and taxpayer identification number (TIN) which is either a Social Security Number (SSN) or Employee Identification Number (EIN).
You may also need to fill in the W-9 if you've earned interest from a bank, dividends from a mutual fund or received payment by other means. This could include cash vouchers or incentive gifts.
The W-9 is held by a third-party using the services of an independent contractor or freelance agent, and is rarely sent to the IRS. It's kept on file for verification purposes. Information recorded on the W-9 and any payment made is reported on the 1099 form.
Officially known as the Request for Taxpayer Identification and Certification, the W-9 is unlike any other tax form. Here is information that'll help you understand when you will be requested to fill one in and why it's important to comply.
Who fills in the W-9?
The person who hires you for a service or employees you on a part-time basis will request you fill in a W-9. This person keeps your information on file and will use it to fill out paperwork when it's time to submit their own tax return.
It's a way of letting the IRS know who carried out work for the company and how much they were paid.
A business owner is obliged to report any payments of US$ 600 or more made during the tax year. This is recorded in the 1099-MISC submitted by the business to the IRS.
Why a business will requests you fill in the W-9 form?
If you are using and paying for the services of an independent contractor and/or freelancer, you are responsible for requesting the person/entity fills out the W-9 and keeping it on file. The W-9 is not sent to the IRS but you need to have it on hand if it's called for by the tax man.
Following this protocol makes it easy for a business to access the relevant details of service providers when it comes time to submit the 1099-MISC to record payments of US$ 600 or more. The 1099-MISC forms part of your 1099 submission which is sent to the IRS.
What information does the W-9 record?
The W-9 is used to record the following information for an independent contractor or freelancer they are hiring:
- Contractor/freelancers name or business name (if different)
- Postal and/or physical address
- Type of business entity i.e. sole proprietorship, partnership, C Corporation, S Corporation, trust/estate, limited liability company or "other"
- Tax identification number (TIN); either an Employer Identification Number (EIN) or Social Security Number (SSN)
In addition, you need to state on the W-9 if you are subject to backup withholding. If you are, the business that hires you is required to withhold income tax from your payment at a flat rate of 24% for tax years 2018-2025. The amount deducted is sent directly to the IRS.
Note: An EIN is used by the IRS to identify a business as a limited liability company (LLC) which is the US-specific form of a private limited company. This is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
A taxpayer identification number (TIN) is an umbrella term which includes the Ein and the SSN. An EIN is a type of TIN but a TIN is not a type of EIN.
When is the W-9 form used?
Typically, the W-9 is completed under the following circumstances:
To fill out the 1099-MISC to record payments of US$ 600 or more, a business needs to supply details of the person who fulfilled a business service. This includes a name, address and tax identification number (TIN).
Employer-part-time employee agreements
Generally, the W-4 and W-2 are used to record information for a part-time employee and the amount paid for the duration of their time at the company, respectively. However, an employer may ask an employee to fill in a W-9 which he/she will send in place of the 1099.
Financial institution-customer agreement
Financial institutions often rely on the W-9 to record the customer's name, address and TIN. It's not necessary to fill out the W-9 to open up a customer account but financial institutions often use the form because it's an useful facility for recording a customer's details.
Some real estate businesses request tenants fill in the W-9. It's not a requirement to secure a property to rent but it's often used as handy facility to record important information.
To avoid backup withholding
Backup withholding is a method used by the IRS to ensure it collects taxes on income that an investor/business may have already spent before a tax bill comes due. It's usually applied when an investor has not met the rules governing TINs.
The W-9 helps the payee avoid backup withholding; where the payee certifies on the W-9 that they are not subject to backup withholding. This allows them to receive the full payment due to them from the payer. It's similar to the withholding exemption certification in the W-4 Form for employees.
How do I know if I am subject to backup withholding?
You will have received a letter from the IRS notifying you that you're subject to mandatory backup withholding. This would happen if you haven't declared all interest and dividends received in a specific tax year.
If you are subject to backup withholding, you must cross out item 2 in Part 2 of W-9 before you submit it.
For more information visit: A guide to the W4 Form
Difference between the W-9 and 1099
The W-9 is used by a business to record a contractor or freelancer's information but it's not usually submitted to the IRS. The 1099 is what a business and all contractors/freelancers will submit to the IRS. The latter records gross income for that tax year.
Difference between the W-9 and W-4
Independent contractors, freelancers and part-time employees responsible for their own tax returns are required to fill in the W-9. If you are fully employed and your employer asks you to fill in the W-9, you need to confirm whether the company sees you as permanent or temporary placement.
Employees working in a permanent, full-time capacity are required to fill in the W-4, not the W-9. The only time you might be requested to fill in the W-9 as a permanent employee is if you've received compensation other than your monthly wages. This could be gifts, store vouchers or a cash incentive.
Is the W-9 used for tax deductions?
No, the W-9 is only used to record and file information for an independent contractor or freelancer and more often than not isn't even seen by the IRS. A business does not deduct income tax from an independent contractor or freelance and neither does it pay Medicare or Social Security on their behalf.
It's the responsibility of independent contractors and freelancers to submit their own tax returns. However, the IRS wants to know how much a business is paying them and this information is submitted by the business to the IRS through the submission of the 1099-MISC.
A full-time employee is not required to fill in a W-9 because the business should already have the person's information on file. Sometimes an unscrupulous employer or one that's struggling financially will ask you to fill out the W-9 purely to save money. Remember, a full-time employee fills out the W-4, not the W-9.
If you are formerly classified as an independent contractor or freelancer, your employer's tax savings will come out of your pocket as self-employment tax. You are then required to calculate and pay your own estimated tax four times a year; and you fill out and submit Schedule C when you file your annual tax return.
The only time a business can request you to fill out the W-9 if you are a permanent staff member is by mutual consent in a case where you've negotiated to work to your own time schedule at a home office and take responsibility for personally submitting your own tax return.
Can I refuse to fill out the W-9?
Yes, you can refuse a request to fill out the W-9 but only if you are suspicious as to why a business has made the request. Be wary of filling out the W-9 if the business does not have a legitimate reason to ask you to fill it out.
If you are a full-time employee, it's not necessary to fill out a W-9. It's only required of independent contractors, freelancers and possibly part-time employees. Also be hesitant if your bank requests you to fill in a W-9. They should have that information on record and may be asking for it merely to report on dividends and interest paid to its customers.
If you refuse to fill in the W-9, your client is obliged to withhold taxes from your payment at a rate of 24%. Businesses in the United States are instructed by the IRS to request the W-9 be completed by any service provider they're paying US$ 600 or more to during the tax year. If either the business or the contractor fails to comply, a heavy fine will be imposed.
How to file a W-9 form
The W-9 is completed on paper or electronically. If the business requesting the W-9 is doing it through an electronic filing system, you need to make sure that a hard copy can also be produced if the IRS calls for it. An electronic signature is required for the electronic form.
If you are an independent contractor or freelance agent, the most secure way to submit the W-9 is a paper copy delivered in person to the company that is hiring your services. Remember, the form is a record of your personal information so always send it direct to a trusted source if your only option is to email or fax the form.
For peace of mind in that case, rather use a reliable courier services such as FedEx or UPS to deliver it door-to-door. That way you're guaranteed the W-9 will not be lost or stolen and fall into the wrong hands.
What identification number do I use for the W-9 form?
- If you are an independent contractor or freelancer operating in your private capacity, you can use an employer identification number (EIN) or a Social Security Number (SSN) when you fill in the W-9.
- If you are a sole proprietor, you can use an EIN or SSN.
- If your business is LLC classified as a corporation or partnership, use the entity's EIN.
- If your business is a single-member LLC that's a disregarded entity, use your personal EIN or SSN.
How do I know the W-9 request is legitimate?
If you are unsure, it's best to speak to a tax consultant for advice. There are a variety of W-9 phishing scams that many people fall victim to; where you receive an email request to fill in the W-9 and that information is used by unscrupulous individuals.
If you get an email from the IRS; beware, it is a phishing scam. The IRS does not initiate contact with taxpayers via email. Never reply to an email or telephone call requesting your fill in the W-9.
A business should either ask you to fill out a paper copy or will assist you with accessing the electronic filing system that they are using.
There are a few exceptions where you may be asked to fill in the W-9. A bank, brokerage firm or lending institution will request it if it has cancelled a debt that you owe.
If you have won a prize in the form of goods or cash at a sports event or you've been lucky enough to win a giveaway on a business promotion, the business may request you fill in the W-9. Again, do not respond to an email notifying you that you've won a prize and need to fill in the W-9. It's another phishing scam.
Steps to follow to fill in the W-9 online
Firstly, make sure you are filling in the W-9 requested for legitimate reasons. Secondly, fill in the information correctly so there are no comebacks.
If you are the business hiring an independent contractor or freelancer, enter your correct employee identification number (EIN). Otherwise known as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number (FTIN), this is a unique 9-digit number assigned by the IRS to business entities in the United States and classifies the type of business entity you operate.
If you are an independent contractor or freelance agent; after you've filled in the name, address and identity number for your business entity, you'll be asked if you're subject to backup withholding and subject to reporting foreign assets.
Where do you get the W-9?
You can either deliver the completed and signed W-9 in person or fax or email it to the independent contractor or freelancer. They in turn will return it in person or return it by fax or email. Remember, the W-9 records private information so make sure it is returned to a trusted source.