1. Purpose of a W-9 Tax Form
2. Penalties and Backup Withholding Related to W-9 Forms
3. Completing the W-9 Form

What are W-9 forms used for? They are typically used in the following circumstances:

  • If an independent contractor receives payment for a service.
  • If an individual pays interest on a mortgage.
  • If an individual invests money in his or her IRA account.

Purpose of a W-9 Tax Form

A W-9 is used when a company needs the following information from its employees or individuals:

  • Names
  • Addresses
  • Taxpayer identification numbers (TINs)

This form and information is used to provide tax documents to the employees or individuals as well as to the Internal Revenue Service (IRS).

Individuals or businesses that are working with employees or others depend on the W-9 form to provide them with the information previously listed. The most important piece of information is the TIN. Furthermore, the W-9 form is used to verify that the taxpayer or individual is not liable to backup withholding.

The W-9 form, also known as the Request for Taxpayer Identification Number and Certification, is often used for employers who are legally obligated to report various income forms that are paid to taxpayers.

The following are examples of the various income types that must be reported by an employer or business:

  • Real estate sales and purchases
  • Mortgage interest paid by the taxpayer
  • Purchase or sales of secured property
  • Write-off of debt
  • Taxpayer investments to an IRA

Form W-9 is commonly used in the following business settings:

  • One business owes another business
  • A business owes an independent contractor that performed a service

Financial institutions also use Form W-9 as a way to acquire information from their customers. This information is then used to complete various 1099 forms to report types of income such as the following:

  • Interest
  • Dividends

Employers or businesses should always request a W-9 form when hiring an independent contractor, especially if he or she will be paid more than $600. Furthermore, employers or businesses may ask for updated W-9a as they see fit; however, this is not required.

There are two parts to a W-9 form. The first part contains information about the business, such as its name and entity type. The second part is a verification of the information provided in the first part. The form asks whether the taxpayer is liable to backup withholding. Backup withholding is held at a fixed rate of 28 percent on income earned by the taxpayer or his business.

There are two frequent causes of backup withholding:

  1. If the name and Social Security number (SSN) provided on the W-9 form doesn't match the records held by the IRS.
  2. If the taxpayer has pending tax debts that the IRS has declared are liable for backup withholding until they are fully paid.

The IRS determines whether or not the SSN provided is accurate using its TIN matching program. If a SSN is determined inaccurate, the IRS can choose whether or not to discipline the taxpayer.

If a taxpayer refuses or forgets to complete a W-9 form for an employer or partner, (s)he will receive a penalty charge of $50. Furthermore, any inaccurate W-9 forms that are not liable to or exempt from backup withholding will be charged a $500 penalty fee.

Completing the W-9 Form

The completion of a W-9 form is simple. An employees provides his name and SSN, while businesses lists its name and employer identification number (EIN). By submitting the W-9 form, the employee is stating that the information provided on it is correct.

Limited liability companies (LLCs) are considered a separate tax structure such as the following:

  • Partnerships
  • C corporations
  • S corporations

An LLC should provide the following information:

  • Name
  • Federal EIN

As instructed by the IRS, the LLC should check either partnership, C corporation, or S corporation as its tax classification. Although it seems incorrect, it should not check the LLC box. The only time the LLC box should be checked is if the LLC is owned by another LLC. In this situation, the parent LLC's tax classification should also be provided.

An LLC owned by an individual must provide the tax classification of the owner as well as the following information:

  • His or her name where indicated
  • The LLC's name where indicated

If you need help with W-9 forms, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.