Did you know the IRS expects all businesses to keep a W-9 on file for every vendor to whom they make payments? The school of thought here is that a business owner should know the exact type of vendor they are paying. Is the vendor an individual or a company? If it’s a company, what type of company is it? The answers to these questions determine whether or not a 1099-MISC should be issued to the vendor every January, and can be documented by requesting a W-9 from the vendor.
The W-9 technically does not expire, but should be updated if any pertinent vendor information changes. The easiest way to find possible changes is to ask for a new W-9 annually. If it’s a new vendor, a good way to insure you receive a W-9 is to require it as a precondition for payment. Generally, corporations are exempt from receiving a 1099-MISC, but there are exceptions for attorneys and physicians, among others. Individuals, sole proprietorships/single member LLCs, and LLCs taxed as partnerships should all receive a 1099-MISC if they are paid more than $600.00 during the year.
When the vendor signs the W-9 they are also attesting to the fact that they are not subject to backup withholding. If an audit occurs and the IRS concludes a vendor should have been issued a 1099-MISC, you as the payer would be liable for the backup withholding of 24% of the amount paid. Penalties would also be assessed for failing to issue the 1099-MISC. If the vendor refuses to give you their taxpayer identification number before you pay them, you should pay what you owe them less 24% and send the backup withholding to the IRS with Form 945. You would need to file the 1099-MISC by paper (a 1099-MISC with no recipient taxpayer identification number cannot be electronically filed) and note the amount of backup withholding in box 4.
Remember, it’s always easier to get the W-9 when you establish a new relationship with a vendor and before any payments are made. While you should be wary of vendors who are reluctant to provide this information, be sure to ask yourself if you are providing a secure way for them to transmit their sensitive information, especially if a social security number is involved.
And as always, if you have further questions about any of the issues raised here, please contact one of us at Pohlman and Talmage and we would be happy to assist you.
~ Todd Figgins, CPA, EA