Let’s start at the beginning. You are required to issue a Form 1099-MISC to any non-employee to whom you’ve paid $600 or more, annually, for goods or services. This requirement is generally thought to apply to “independent contractors,” but that’s an overly restrictive definition. Many of your vendors should be included, as well.
A W-9 is the form a vendor (or independent contractor) uses to provide you with its tax identification number, which is what you need to issue a 1099-MISC. In simple terms, these two IRS forms work hand in hand.
You are not required to issue a 1099-MISC to a corporation or an LLC taxed as a corporation. This complexity is often the trap that leads to non-compliance.
How do I know whether my vendor is taxed as a corporation?
Simply, you don’t. You could assume the vendor’s legal status based on its business name. This is tricky, because companies often operate with fictitious names. "Acme Anvils" could be a sole proprietorship owned by Wile E. Coyote.
You could check your state’s online business records, typically maintained by the Secretary of State. But while this may indicate corporate status, it won't tell you whether an LLC is taxed as a disregarded entity, a partnership, or a corporation.
Before you throw up your hands and decide W-9 compliance is completely unmanageable, remember, it’s simpler than you think.
What should the process look like?
- Collect a Form W-9 anytime you prepare to pay a new vendor. Download the form here.
- In your accounting software, record the vendor’s tax identification number and designate the vendor as one that should receive a 1099-MISC (note: for proper internal control, vendor setup should be done by someone other than the person who prepares checks).
Don’t make the mistake of issuing a payment to a vendor and then asking for a W-9. The incentive to provide you with a W-9 ends as soon as your check is cashed, and you’ll likely give up after a few attempts to chase it down.
Simple, right? Here are some follow-up thoughts --
If I ask for a W-9, will my vendor’s representative even know what I’m talking about?
Unless it’s someone who is just starting out in business, yes, they’ll know. Even though non-compliance is fairly common, it’s likely another customer has asked your vendor for a W-9 in the past. Since the W-9 is not individually tailored to each customer, your vendor probably has an already-completed form.
I pay utilities every month. Do I really need a W-9 from each utility company?
You may be assured that your local utility provider is taxed as a corporation; therefore, you don’t need a W-9. On the other hand, if you ask for one, you’ll get it.
What if I don’t pay a vendor more than $600 annually? Isn’t the W-9 a waste of time in that case?
Theoretically, yes. If you prefer, you may decide to only request a W-9 when you know a vendor will be paid more than $600 annually. That will require you to keep track of cumulative payments and request a W-9 at the right time. Arguably, it’s easier to request a W-9, in advance, from every vendor.
What if I don’t issue 1099-MISC’s? After all, I haven’t been, and the IRS hasn’t questioned it.
Through the power of technology, the IRS is getting better all the time at tracking unreported income. An IRS examination of any of your vendors can easily lead back to your organization. The fine of $100 for each unissued 1099-MISC will add up quickly.
What if we don’t have W-9’s for our current vendors?
Then you have some work to do. First, you will want to identify “dead” vendors -- ones in your accounting software that you are no longer using. Deactivate them, which has the added benefit of cleaning up your records.
Second, send a letter to each of your active vendors, requesting a W-9 by mail or fax within thirty days. If you don’t have a vendor’s W-9 by the deadline, withhold further payments to that vendor until you get one.
Are there security concerns?
Since a W-9 contains a vendor’s tax identification number, you have a legal responsibility to maintain the confidentiality of that information. Your accounting software and your digital records must be secure from intrusion by anyone without a need to access them, both inside and outside the organization. The same goes for your paper files.
Do you see the value of this simple and dependable W-9 and 1099-MISC process? Will you implement it as a new process? Will you modify it to meet the needs of your organization? Can you remedy what you may have overlooked in the past? Please share your thoughts.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFO’s serving nonprofits and businesses. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.