If you’re an independent contractor or freelancer, you’re probably familiar with the W9 Form you have to fill out for your clients before you provide your services. What is the purpose of a W9? It’s the request for taxpayer identification number and certification, and any business paying an independent contractor more than $600 annually must report such payments to the IRS. For that purpose, they use a Form 1099-MISC, but they must have the payee’s information on a W-9 to fill out the Form 1099-MISC. Most companies will not issue a payment to an independent contractor unless they have a W-9 on file. The 1099-MISC is also filed for those who have received money or property prizes or awards.
W9 General Information
When you are an independent contractor or freelancer, your clients don’t withhold Medicare, Social Security and income tax when they give you a check. That doesn’t mean you don’t owe these taxes, and when it comes to Social Security, you must pay the entire amount yourself, rather than the half, or 6.2 percent of earnings, paid by an employer. Of course, the IRS must know how much you made to ensure you fulfill your tax obligations, and they receive that information from the Form 1099-MISC. The client sends the W-9 to you, not the IRS. If you think you are an employee rather than an independent contractor, you should not fill out a W-9, but it is imperative that you straighten out your employment status with the company for which you are performing work. Employees fill out Form W-4, which includes withholding allowance for your paychecks. The W-2 form is used to report salary or wages to the IRS. The IRS considers a person an employee if the company has the right to control what the worker does and how they do the job, and if they receive certain benefits such as medical insurance, paid vacation, retirement plan and the like. An independent contractor is self-employed and provides services to other businesses or clients. Such contractors are subject to self-employment tax.
Besides clients reporting income paid to you, the W9 is also used for reporting real estate transactions, debt cancellations, contributions made to your IRA, mortgage interest and the “acquisition or abandonment of secured property,” as per the IRS. Obtain the Form W-9 by calling the IRS at 1-800-TAX-FORM or by downloading it from the IRS website.
How to Fill Out a W9
Filling out the W9 is fairly straightforward, and the IRS provides instructions. The initial section of the W9 form relates to your personal information. On the top line, you must fill out your name as it appears on your federal income tax form. If your business name is different from your legal name, you must include that on the second line. The third section asks you to check the appropriate box for your federal tax classification, and you must choose one of the following: Individual/sole proprietor or single-member LLC; C Corporation; S Corporation; Partnership; Trust or estate or limited liability company.
You must enter the tax classification, but make sure you check the appropriate box in the line above for the tax classification of a single-member owner. You don’t check LLC if “the LLC is classified as a single-member LLC that is disregarded from the owner unless the owner of the LLC is another LLC that is not disregarded from the owner for U.S. federal tax purposes,” according to the IRS. For a single-member LLC disregarded from the owner, check the right box for the owner’s tax classification.
Line 4 deals with exemptions for accounts outside the United States, but the codes don’t apply to individuals, only certain types of owners. If applicable, enter the exempt payee code or the exemption from the Foreign Account Tax Compliance Act. Enter your address on lines 5 and 6. Next to the address line is a box for the requester’s name, but it is optional. Line 7 asks for your account number, but that is also optional.
Part 1 of the W9 deals with the Tax Identification Number or TIN. You can enter your Social Security number or Employer Identification Number (EIN), but either must match the name on the first line of the W9 form, or backup withholding will occur. Backup withholding tax is levied on investment income at a pre-established tax rate, as the income is withdrawn by the investor. As of 2018, the backup withholding rate is 24 percent. Payments subject to backup withholding may include interest, including tax-exempt interest; dividends; royalties; rents; non-employee pay; payments made in “settlement of payment card and third party network transactions,” as well as certain fishing boat operator payments. However, real estate transactions are not subject to such withholding. For their TIN, most individuals will use their Social Security number, but not for resident aliens, sole proprietors or disregarded entities. For other parties, enter the EIN.
Part 2 of the W9 is the certification, and you must sign and date this section. Under penalty of perjury, you are certifying that your TIN is correct, or that you are waiting for the issuance of a number. You must certify that you are not subject to backup withholding and that you are a U.S. citizen or U.S. resident alien, or a partnership, company, corporation or association created or organized in the U.S. or under U.S. law. Non-foreign estates and domestic trusts are also included in this certification.
Other W9 Requirements
If you do not furnish the correct TIN to a requester, you are subject to a $50 penalty for every such failure unless due to “reasonable cause and not to willful neglect.” There is also a civil penalty for entering false information regarding withholding. Anyone making a false statement that has no reasonable basis and results in no backup withholding is subject to a $500 penalty.
Electronic W-9 Submission
It is possible for a requester to set up an electronic submission system for Form W-9. Faxing is considered an electronic submission. The electronic system must ensure the information received is the same as the information sent. The requester must document all user access resulting in submissions, and provide reasonable certainty that the person submitting the form is indeed the person identified on the W-9, or their registered broker or investment advisor. All information on the electronic submission must be the same as a W-9 on paper, and such a paper copy must be provided should the IRS request it. The final entry on the submission is the electronic signature of the person named in the W-9 for submission verification. Place the electronic signature under the penalties of perjury statement as per the paper W-9.
The IRS permits requesters to develop their own, substitute W-9 as long as the content is “substantially” the same as that on the IRS Form W-9. Such a substitute must satisfy requirements for certification. On a substitute W-9, the certifications must state clearly the same information as found on Part 2 of the IRS's W-9 form, including that any misrepresentation is under penalty of perjury. When using a substitute W-9, including a separate signature line only for certifications complete the requirement for stating certifications clearly. If the substitute form uses a single signature line for required certifications and other information, you are required to highlight the certifications. The IRS permits you to do so in various ways including highlighting, using bold-face type or boxing. The bottom line is that the certification language must stand out from the rest of the information on the substitute W-9. The IRS requires that a substitute form also include the following information above the signature line, and it, too, must stand out: “The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required to avoid backup withholding.”
If a FATCA exemption code does not apply, you may omit that section from the substitute form, but you must let the payee know that FATCA doesn’t apply. What you cannot do with a substitute form is require the signer to agree to provisions that have nothing to do with the required certifications. You also cannot imply that the signer is subject to backup withholding, except if the signer agrees to provisions that have nothing to do with the required certifications.
When using a substitute W-9, the IRS requires you to provide the Form W-9 instructions to the signer only if they request them. There is a caveat: If the IRS notifies the signer that they are subject to backup withholding, you must tell the signer to remove the language in the certification relating to underreporting. You are permitted to relay this information either in writing or orally. Since the IRS instructions include the term "defined below,” you may replace that with the term “defined in the instructions” for item 3 of the Certification on Form W-9 if no instructions are provided except by request.
Awaiting TIN Certificate
As for dividend and interest payments and payments for readily tradable instruments, the signer must provide you with a signed and completed W-9 and write “applied for” in Part 1 for the “awaiting-TIN” certificate. From the date of your receipt of this W-9, the signer has 60 days to give you a TIN. Once that time has passed, and you have still not received the TIN, you must start backup withholding for payments. Other conditions apply, including backup withholding on payments during the 60-day grace period if the person withdraws more than $500 at one time, although there is an exception if the person reserves the same amount as the current year’s rate for backup withholding on every reportable payment for the account. There are two additional options. You may use backup withhold during the 60-day period, other than a seven-day interim period if you do so on any reportable payments should the person make an account withdrawal after seven business days after you receive their “awaiting TIN” certificate.
You should consider reportable payments as all cash withdrawals made from the date you receive the “awaiting-TIN certificate” to the withdrawal date. You may also perform backup withholding on reportable payments made to the account, whether or not withdrawals are made, starting no later than seven business days after receipt of the “awaiting-TIN certificate.” Keep in mind that the 60-day period from backup withholding only applies to dividends, interest and the payments relating to readily tradable instruments. All other reportable payments are subject to immediate backup withholding, even if the person has an application for a TIN in place. If the person gives you an “awaiting-TIN certificate,” backup withholding on reportable dividends and interest is required unless the person has certified under penalty of perjury that they are not subject to such withholding. Failure to collect backup withholding when required can leave you liable for uncollected taxes.