Let’s talk W9s! What the heck is a W9 and why do you need them? At the very basic level, a W9 is a pretty simple (well, relatively speaking considering it is an IRS form) IRS form used to provide information to one company from another. That’s it. Pretty simple. It’s just a form.
But, what the heck is this form used for? This form is used to determine if a business or entity is eligible for a 1099 (a 1099, simply put, is an information filing form used to report certain incomes to the IRS) at year end. By asking for this form from a vendor, you are simply just trying to determine if you need to report those payments to the IRS via a 1099. No need to send the W9 to the IRS or do anything fancy with it. Just keep it for your files (in a secured location, of course). That’s it!
How do we determine who to ask for a W9? You should ask any person or company that provides a service to your business (though there are a few exceptions). Some common types of services might include consultants, attorneys, accountants, freelancers, and non-corporate landlords. If it is a service and not merchandise, go ahead and ask for that W9.
You said exemptions earlier so what are those, you ask? Freight, storage, telephone services, and reimbursements to employees are exempt from needing a W9.
What do I do with those W9s when I receive them? Well, the first thing I like to do is add them (attach them if you can) to your vendor’s account in your accounting software by adding the tax identification number and marking whether you will need to later issue them a 1099. This confirms you are always prepared for end of the year and 1099 issuance.
How do you determine whether a W9 is worthy of a 1099? First, if the service didn’t amount to over $600 for the year, no 1099 is necessary. From there, the list is a bit lengthy, but in general do not issue a vendor a 1099 if they are operating as an S or C-corporation (even if that is an LLC or partnership taxed as an S or C-corporation), sellers of merchandise, freight, or storage. There are always a few little exceptions to rules, and lawyers are one. Even if they are incorporated, you are still required to send a 1099 if they meet the $600 threshold for service. Also, you do not need to include amounts paid through credit card, debit cards, and third-party payment networks such as Paypal. Though there seems to be some confusion on whether or not to include Venmo payments on a 1099 and the verdict is YES. Venmo behaves a bit different from a third-party payment network so Venmo amounts SHOULD be included in 1099s.
Someone asked me for a W9. Why? Well, likely you provided a service to them, and if you did not, I’d reconsider sending that W9. Now, again, there are a few exceptions like your financial institutions. They may ask in certain situations and that likely will get the thumbs up. If you have any questions as to why they are requesting a W9 from you, just ask. By law, it is your obligation to provide a W9 to parties that meet those same criteria like dividends, non-employee compensation, or other reportable income. If you ask, and their reason doesn’t align, you legally do not have to provide one.
Trust me when I say one of the best practices a business owner can implement is asking for that W9 upfront and prior to the very first payment issued to any vendor. You just never know what can happen throughout the year, and if you don’t collect it upfront, you will be scrambling and begging for those W9s at the end of January when 1099s are due. I love this program called track1099.com and though their specialty is electronic issuance of 1099s, they also have a super-easy, super-inexpensive W9 request system where the vendor can complete and sign the W9 securely online for peace of mind. You just print and file (in a secured location, of course).
Short and simple: Treat that W9 like your best friend. If you lack the data you need to issue a 1099 at year end, remember that the IRS imposes some pretty stiff penalties. Do yourself a favor and put those processes in place to set yourself up for a smooth year-end 1099 process by getting those W9s upfront!