Our company employs several freelancers - should we issue them a W9 every January, or must we give them a W9 as soon as they start work?
Answers
I think you are asking if you need to get an updated W-9 "from" them on an annual basis. The W-9 is your backup for those who are to be issued 1099's. I treat my personal freelancers the same way as my suppliers. They get asked at the beginning of each year to provide an updated form. Although you will always hear from the IRS first, it forces people/contractors/small businesses to identify if they have a withholding requirement.
Additionally, you need to request one when they first join your company, mandatory before you will issue your first payment to them.
If you pay an individual/entity over 600 dollars, you must issue a 1099. The key piece of information needed to issue the 1099 is the
Never issue a payment for a service unless you have their W9 on file. Their EIN would not change, so there is no need to get new ones annually.
And read them carefully. We find many invalid w9s.
Such as:
SS#s with dba names, like that is the name on their SS card.
W9s completed as corporations, but checks not made out to the corp. Love that one. LLCs (a state designation) can file as anything federally, but it is amazing how people are clueless to their legal name or what their name is on their own tax return.
The current W9 form made this LLC problem worse. Disregarded sole proprietorship LLCs do NOT check LLC.
Brilliant.
And payable departments are clueless.
Found a 1099 printed yesterday to a Dr John Smith.
Really? He was born a doctor?
Reminder:
The IRS has the right to ding the employer for the 28% holdback tax if the EIN was not obtained and they find a 1099 not issued. That is a huge incentive for companies to take this issue seriously. The government is hungry. Watch your back.
The W-9 instructions say only that you as the vendor are responsible for giving updated information to the company who is paying you if anything changes. There are no other instructions in Form W-9 or 1099-MISC that refer to the need to get annual Form W-9s. However, on the back end if you get a B notice from the IRS that says the TIN you used for a vendor doesn't match or is wrong you will have to go back to the vendor and get an updated Form W-9.
DISCLAIMER: This answer is for discussion purposes only, and the reader should obtain qualified tax advice or do their own adequate tax research to develop a solution.
There is definitely a lot of misunderstanding and problems with the forms and those who like to subvert the IRS by providing bogus info.
Here is what you can do as a business to help protect yourself.
As part of your new vendor acceptance process:
1. Require them to fill out a W-9 - Once there has been a request made to complete a W-9, there is no opt out option, they must provide the correct information and complete the form. There is a $50 penalty for any business failing to complete the form. You can track the W-9s you send out, and if the IRS comes back on you for incorrect information, you provide the W-9 list you requested and the fine goes to the business failing to provide the correct information, not you. If you scan all the forms you send out at one time you can save them on a CD.
2. Require any new vendor to supply proof of their State business license.
3. Your State Secretary of State probably requires annual entity renewals and those filings are public information. You can obtain proof of federal EIN from those records most likely. If not you can request the vendor to supply a redacted copy of the 1st page of their business federal return showing the EIN. "Redacted" means they supply the header of the page, not their actual revenue and expenses. This verification step can be eliminated by relying on #1 above if you build it into your vendor acceptance process.
4. If you are doing business with independent contractors, explain to them you want their EIN not their social security number. This will avoid the 1040 vs ignored LLC issue. Most people don't understand they can use their EIN when they are new businesses because they have an employee-mindset and have always used their SSN instead.
Including the request for the W-9 at the front end of the vendor relationship, as well as any sales tax exemption certificates will go along way to taking the pains out of obtaining the information you need.
There is no requirement to obtain a W-9 annually, however it might be good practice to survey your vendors for any changes periodically, say 2 years.
If you get audited for 1099 compliance by the IRS, these elements will provide a policy and procedures based support that will protect you, and ensure that those who did not provide you with correct information will receive the penalty, and a nice appointment for audit with the IRS.
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Tax