September 13, 2021 | 5-minute read (834 words)
We get it. Taxes are tricky! And concerns of identity fraud are on the rise, often featuring malicious requests for tax forms that feature sensitive personal information. This is why it’s important to be familiar with which forms you need to fill out and which ones you don’t. A common question we get is: what is a W-9 Form? The W-9 Form is a standard IRS form you'll encounter if you own a business or offer services as an independent contractor or freelancer. However, many people are still confused about whether they need one and how to fill it out. So, what's a W-9 and what is a W-9 used for?
We'll help you understand the W-9 form purpose and provide you with tips and guidelines on filling W-9 2020 and 2021 forms correctly.
What is a W-9 Form?
Getting the taxpayer identification number of a service provider or freelancer is the primary purpose of the W-9 Form, meaning it's sent to another taxpayer and not directly to the IRS. In turn, businesses and institutions use the taxpayer information in the W-9 Form to complete their other IRS forms. The most common is Form 1099, which is used when a company reports payments made to third-party service providers over $600 in a calendar year.
1099’s are needed because businesses only withhold the taxes from their internal, direct employees, not outside contractors or freelancers they hire. The responsibility of reporting falls on the contractors themselves. Form 1099 is one way the IRS knows how much money these contractors earn and, consequently, how much withholding tax they owe.
Form W-9 indicates if the contractor or freelancer is subject to backup withholding. If yes, businesses hiring them would need to withhold the taxes for them at a flat rate of 24%.
Who Should Fill Out a W-9 Form?
The most common entities who need to fill out Form W-9 are independent service providers like freelancers and consultants who receive more than $600 per tax year from a single client. As explained above, the W-9 is used by businesses to complete Form 1099 and adequately report your payments to the IRS.
Financial institutions also require Form W-9 for specific situations. Banks, for example, need it if you plan to open an account. They also use Form 1099 to report proceeds and dividends from investments, interests, and real estate sales you make.
Finally, a W-9 can also be sent to individuals who cancel your debt. In this case, they would need your taxpayer information to fill up Form 1099-C for submission to the IRS.
Who Should Not Fill Out a W-9?
Since a W-9 Form deals with private information like your Social Security and Tax Identification Number, you should be very careful whom you send it to. You could become the victim of identity theft if it gets into malicious hands. Be wary of getting a random request for Form W-9, especially if it's from an unknown and unexpected source that's not your client or bank.
However, there are also sometimes when a legitimate source might request a W-9 Form inappropriately. For example, if you're a full-time employee, your employer should withhold taxes on your behalf and will, therefore, not need a W-9 Form from you. You should get a W-4 Form instead.
If you have mistakenly given your employer a W-9 form, you can be responsible for paying taxes and benefits yourself and be ineligible for unemployment compensation. The bottom line is to always keep in mind that a W-9 Form is only needed to accomplish another IRS form.
When in doubt, ask the person requesting you fill out a W-9 Form what they will use it for. If it's for something other than what they need for submitting to the IRS, or they can't answer you in a straight manner, don't fill it out.
Filling Out an IRS W-9 Tax Form: Necessary Information
So, what's a W-9 form asking for when you fill one out? It's primarily basic information, including the taxpayer's name and Social Security number for sole proprietors or contractors. If you have a separate business name, you need to enter that as well. Specify the business structure (whether partnership, corporation, LLC, etc.), as well as your business's tax ID. After that, you must also certify that you're not eligible for backup withholding.
Once done, simply send the W-9 Tax Form directly to the requesting party. If you're a business owner and get a completed W-9 Form, keep it safely on file. Remember to safeguard the private information contained there to prevent legal troubles down the line.
Need More Help With Your Taxes?
Now that you can confidently answer the question "what is a W-9 form," you're better equipped to deal with taxes when you hire contractors or if you are one yourself.
For tax and accounting concerns, contact Early Growth. We'll help you navigate the IRS's sometimes tricky tax rules and regulations to ensure you don't land on their bad side!