Form W-9 Explained: What It Is and How It Works

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Form W-9 is a crucial part of the U.S. tax system, yet many people are unsure about its purpose, when it's needed, and how to correctly fill it out.

In this blog, we’ll discuss everything about Form W-9 to provide you with a clear understanding of its function and how it should be filled.

What is Form W-9?

Form W-9, officially known as the "Request for Taxpayer Identification Number and Certification," is a document used to gather or confirm taxpayer information from individuals and entities in the United States. 

It is primarily utilized by businesses to obtain the taxpayer identification number (TIN) of individuals, sole proprietors, partnerships, LLCs, corporations, and other entities that are not subject to backup withholding.

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By obtaining the correct TIN from the payee, businesses can fulfill their reporting obligations and ensure that the recipient's earnings or losses are appropriately documented on their federal tax return, ultimately affecting their taxable income. This information exchange helps maintain transparency and compliance within the tax system.

Purpose of Form W-9

The main purpose of Form W-9 is to provide accurate information to entities that will report certain types of income to the Internal Revenue Service (IRS). This form is essential for:

Gathering Taxpayer Information

Form W-9 is used to collect essential taxpayer information from individuals and entities, such as their legal name, taxpayer identification number (TIN), and address. The TIN can be either a Social Security Number (SSN) for individuals or an Employer Identification Number (EIN) for businesses.

Reporting Payments to the IRS

Businesses and other entities use the information provided on Form W-9 to report certain types of payments made to individuals and entities during the tax year to the Internal Revenue Service (IRS). These payments include payments made to independent contractors, freelancers, vendors, and other non-employee service providers.

Preparing and Issuing 1099 Forms

The information obtained from Form W-9 is crucial for preparing and issuing Form 1099-MISC (or other 1099 variants, such as 1099-NEC) to recipients who received $600 or more in payments during the tax year. The recipient of the 1099 form will use it to report their income on their federal tax return.

Backup Withholding

Form W-9 also plays a role in backup withholding. If the payee fails to provide a valid TIN on Form W-9 or if the IRS notifies the payer that the TIN provided is incorrect, the payer may be required to withhold a percentage of future payments as backup withholding. The withheld amount is then remitted to the IRS.

Filling up Form W-9

Filling out Form W-9 is a simple process. Here's a step-by-step guide to help you complete the form accurately:

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• Obtain the W-9 Form: You can get the form from the IRS website by clicking here.

• Enter Your Name: Write your full legal name on the first line of the form. Make sure it matches the name on your tax returns.

• Business Name (if applicable): If you operate under a business name or a disregarded entity name (for certain entities), enter it on the second line. If not applicable, leave this line blank.

• Federal Tax Classification: Check only one box that best describes your tax classification. The options include:

1. Individual/Sole proprietor
2. C Corporation
3. S Corporation
4. Partnership
5. Trust/Estate
6. Limited Liability Company (LLC) treated as a disregarded entity
7. Other (specify if none of the above apply)

• Exemption Codes (if applicable): If you are exempt from backup withholding or subject to reduced withholding, enter the appropriate exemption codes on the form.

• Address: Provide your business address, including the street address, apartment or suite number, city, state, and ZIP code.

• Account Numbers (if applicable): If you have account numbers with the requester that will be used for reportable payments, include them in the designated box.

• Taxpayer Identification Number (TIN): Enter your TIN in Part I. For most individuals, this is their Social Security Number (SSN). For business entities, it is typically an Employer Identification Number (EIN).

• Certification: Review the completed form for accuracy, then sign and date it in Part II to certify that the information provided is correct.

• Submit the Form: Return the filled-out Form W-9 to the requester who needs your taxpayer information. They will retain it for their records and use it for tax reporting purposes.

Consequence of Non-Compliance with Form W-9

Individuals and businesses must understand the potential consequences of non-compliance with Form W-9 requirements. Failure to provide a completed Form W-9 to the requester can lead to significant implications. 

Let's discuss some of the consequences:

• Withholding Taxes: If you fail to provide a completed Form W-9 to the requester, the payor may be legally obligated to begin backup withholding on future payments made to you. Backup withholding is the process of withholding a percentage of payments and remitting it to the IRS. As of 2022, the backup withholding rate is 24% of the payment.

• Penalties for Incorrect TIN Information: If you provide incorrect or incomplete TIN information to the requester and cannot provide reasonable errors for the oversight, you may be subject to a penalty of $50 for each failure. This penalty can add up for multiple incorrect or missing TINs.

• Penalties for False Statements: Intentionally making false statements on Form W-9 without a reasonable basis, leading to no backup withholding, can lead to a penalty of $500 per false statement.

• Criminal and Civil Penalties: Willfully falsifying certifications or affirmations on Form W-9 can have severe consequences, including fines and imprisonment.

• Misuse of W-9 Information: Safeguarding the confidentiality of W-9 information is crucial. Unauthorized disclosure or misuse of another party's W-9 information, in violation of federal law, can result in civil and/or criminal penalties.

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FAQs

1. What is Form W-9 used for?

Form W-9 is used to provide taxpayer identification information to businesses and other entities that need to report certain types of payments to the IRS.

2. Who needs to fill out Form W-9?

Individuals, freelancers, independent contractors, and business entities who receive payments of $600 or more from a business or entity need to fill out Form W-9.

3. What is the difference between Form W-9 and Form W-4?

Form W-9 is used to provide taxpayer information to the payer, while Form W-4 is used by employees to inform their employers about the amount of tax to withhold from their paychecks.

4. What happens if I don't fill out Form W-9?

If you fail to provide a completed Form W-9 to the payer when required, they may be required to withhold a portion of your payments as backup withholding.

5. Do I need to submit Form W-9 to my employer?

No, Form W-9 is typically not required for employees. Employers use Form W-4 to determine the withholding amount from an employee's paycheck.

6. Can I provide a TIN other than an SSN or EIN on Form W-9?

Yes, you can provide an Individual Taxpayer Identification Number (ITIN) or an Adoption Taxpayer Identification Number (ATIN) if applicable.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!