When we talk about payroll, most people think about full-time employees and regular paychecks, but that isn’t the only type of working relationship many of today’s small businesses enter into.
As the gig economy grows, more and more businesses are working with independent contractors (or freelancers), too. This new type of relationship carries its own host of tax complexities and reporting requirements.
We created this guide, as part of our Payroll education center, to help business owners navigate those concerns that come with working with independent contractors.
In this guide, we cover IRS Form W-9, the Request for Taxpayer Identification Number and Certification. We cover all the bases, explaining:
What Form W-9 is
Why businesses need to have contractors fill it out
How to know if you need to have contractors complete Form W-9
How W-9 forms work
What is Form W-9?
Here’s the quick-and-dirty version of what IRS Form W-9 is all about:
What’s reported on Form W-9: Contractor business details and Taxpayer Identification Number (TIN)
When it’s filled out: When you begin working with a new independent contractor
Who needs to fill it out: Most independent contractors in the U.S.
Basically, Form W-9 is a document that businesses collect from each independent contractor they work with as soon as they begin working together.
Unlike many other tax and payroll forms, it isn’t submitted to the Internal Revenue Service (IRS) or any other tax authority. Instead, businesses hold onto their contractors’ completed W-9 forms and use the information provided to compile annual Form 1099-MISC
When contractors complete Form W-9, they share key information about their business and its legal classification, including:
Business name (if different from their actual name) and address
Federal tax classification (i.e. sole proprietor, limited liability company, S corporation, etc.)
Taxpayer Identification Number (TIN) or social security number (SSN)
Businesses who work with contractors need this information for those Form 1099-MISC. In addition to filling out Form W-9 when they begin work, contractors should also furnish an updated W-9 form whenever the information included on it changes (if they move, for example, or reclassify their business).
How is Form W-9 different from Form W-4?
Forms W-9 and W-4 are similar in that they’re both a key part of entering into a new working relationship with someone. The difference comes down to the type of working relationship in question.
As we mentioned above, Form W-9 is strictly used to get information from independent contractors. Form W-4 on the other hand, is filled out by employees. W-4 forms include more information than a W-9, including the employee’s:
Why businesses need to have contractors fill out Form W-9
One of the key differences between working with independent contractors versus employees is that contractors are responsible for paying their self employment taxes themselves vs. and employee whom the employer will withhold the employee portion from along with remitting their employer portion. That said, the IRS still needs a way to keep track of the money paid to contractors, and ensure they’re reporting all of the income they earn.
That’s where Forms W-9 and 1099-MISC come into play.
Form W-9 and 1099-MISC
Annually, any contractor paid in excess of $600 (2019 limit) must be furnished a Form 1099-MISC, the form is also required to be filed with the IRS and applicable state agencies .
On this form, businesses need to include, among other pieces of information, the contractor’s:
Name (or business name)
Taxpayer Identification Number (TIN)
That’s where the need for contractor W-9 forms emerges—these forms enable businesses to request and store the information needed for annual 1099-MISC forms.
Do I need to have contractors fill out Form W-9?
By now, you might be wondering whether or not you need to have contractors fill out Form W-9. The safest and simplest answer is yes. Whenever you begin work with a new independent contractor, your best bet is to have them fill out a Form W-9 so you have their information on file.
The $600 rule
That said, your business isn’t required to generate Form 1099-MISC for any contractor to whom you paid less than $600 to in 2019. However, regardless of the amount you expect to pay out during the year it is still best practice to have each contractor complete Form W-9.
How W-9 forms work
For our purposes here, we’ll assume you’re paying independent contractors more than $600 annually (2019 limit) and you need to secure completed W-9 forms from them. So let’s talk about how that works.
From the business side, Form W-9 is remarkably easy to complete because it doesn’t require any information from you. All you need to do is send a blank copy of the most current Form W-9 and ask the contractor to complete and return it. That’s it!
What to do with completed W-9 forms
Unlike many of the payroll, new hire, and tax forms you may have encountered, Form W-9 doesn’t require that you file the form with any federal or state authority. In effect, Form W-9 is simply a way for you to secure the contractor information you need.
So, what do you do with completed W-9 forms? Simply put, you should store W-9 forms and have them at-the-ready come tax season. When January rolls around, you’ll be able to reference these forms to help complete the required Form 1099-MISC for your contractor friends.
A note on security
When you ask a contractor to fill out Form W-9, you’re asking them to share sensitive data (i.e. their social security number) with you and your company. And unlike many employee relationships, it’s likely they need to share this information electronically (instead of in-person).
For that reason, it’s important that you both send and store W-9 forms in a secure location; be prepared to answer questions about the steps you’re taking to ensure their information is kept safe.
If you work with a freelancer or contractor for some time, it’s always possible the information on their Form W-9 will change. They may move, for example, or transition their business from a sole proprietorship to a limited liability company (LLC).
For that reason, it’s good practice to ask contractors to complete a new Form W-9 at the beginning of each calendar year. This is also a good time to remind them they can submit a new Form W-9 to you at any time if their information changes.
W-9 forms are one of the simplest forms from the business owner’s perspective. Still, it’s important to understand what they’re used for, as well as when and why you need to have contractors fill them out.
To wrap things up, these are the most important points to remember about Form W-9:
Form W-9 provides businesses with the information they need to compile annual Form 1099-MISC for the contractors that they work with (and pay more than $600 to annually)
It’s good practice to request a completed W-9 form from every contractor you work with at the beginning of the relationship