Why You Should Ensure that You Have W9s on File Before Paying a Contractor
As a business owner, one of the most common—and sometimes most frustrating—tasks you will face is gathering W9 forms from your contractors, especially when it’s time to file 1099s. Filing 1099 forms is an essential part of your tax reporting obligations, as they are used to report payments made to non-employees, including independent contractors, freelancers, consultants, and other types of service providers. These forms help the IRS track income that isn’t derived from an employer-employee relationship.
But what makes W9s such a critical part of this process? Let’s dive into why it’s so important to ensure that you have these forms on file before paying any contractor.
What Is a W9 Form and Why Is It Important?
A W9 form is a document that provides essential information about a contractor or vendor. It is very similar to the W-4 form that you would gather from your employees when they start working for you. However, instead of being used for employees, the W9 is specifically for independent contractors and vendors.
The W9 form collects a variety of important data, such as:
- The contractor’s legal name or business name (if they operate as an LLC or another entity),
- Their Employer Identification Number (EIN) or Social Security Number (SSN),
- Their mailing address,
- And their business status or incorporation status.
This information is necessary to accurately issue a 1099 form at the end of the year. Without it, you cannot comply with IRS reporting requirements. So, essentially, the W9 form serves as the official document you need to report payments made to contractors for tax purposes.
When Do You Need a 1099, and How Does It Relate to the W9?
Once your business pays a contractor over $600 in a calendar year through methods like checks, ACH transfers, or wire payments (basically, any payment that doesn’t involve a credit card), you are legally required to issue a 1099 form for that contractor. This form serves to report the total amount you’ve paid them throughout the year.
Now, this is where the W9 form comes into play. Without the information contained in the W9, you will be unable to issue the 1099 correctly. You will need the contractor’s EIN, legal business name, and other key details to accurately report payments and remain compliant with the IRS. If you don’t have the W9 form, you risk missing out on filing the necessary paperwork, which can lead to penalties or fines.
What Happens if You Don’t Have W9s on File?
It’s critical to understand the consequences of not obtaining a W9 from your contractors before paying them. Here’s why:
If you fail to collect a W9 form from a contractor before making a payment, you could run into serious problems when it’s time to file your 1099s in January. By the January 31st deadline, you’ll need to have all your 1099s filed, and without a W9, it’s impossible to correctly issue these forms.
If you don’t have a W9 on file by the deadline, you’ll be forced to paper-file the 1099 forms. This method is much more time-consuming, inefficient, and prone to errors. Additionally, paper filing often results in delays, which can lead to missed deadlines and complications with the IRS.
Most accounting firms will charge extra if you’re asking them to paper file your 1099s. And payroll and accounting software platforms like QuickBooks, Gist, and ADP won’t help with paper filing. This means that if you find yourself in the position of needing to paper file, it could cost you a lot of time, energy, and money—time and effort that could’ve been avoided if you’d simply gathered a W9 upfront.
The Best Practice: Get W9s in Advance
One of the easiest ways to avoid these headaches and ensure compliance is to get W9s from your contractors before they begin any work. Ideally, you should have this documentation on file before any payment is made.
This proactive approach means that by the time you issue a payment, you will already have all the necessary information to correctly file the 1099 at the end of the year. This can save you a lot of stress during tax season, especially when you’re juggling multiple contractors or vendors.
What Happens If You Forget to Get the W9?
Let’s consider a real-world example to illustrate the potential consequences of not having the W9 form on file:
Imagine you hire a contractor to perform a service or install something for your business. You agree to pay them $2,000 for the work, and they complete the job successfully. But after this, you don’t work with them again. Since you’ve paid them more than $600, you are legally required to issue a 1099 for this contractor.
However, if you did not request a W9 form before paying them, you won’t have the necessary information (such as their EIN, business name, or address) to properly file the 1099. Now, you’re stuck trying to obtain this information after the fact. If the contractor is unresponsive or you simply cannot get the W9 form, you will be forced to paper-file your 1099.
Not only is this process time-consuming, but it also increases the likelihood of errors in your tax filings. Worse, you could face penalties or interest charges from the IRS for failing to comply with the 1099 filing requirements. The cost of these fines and penalties could easily outweigh the small amount of time it would have taken to collect the W9 in the first place.
Handling Contractors Who Won’t Provide a W9
If you find yourself in the unfortunate situation of having to hunt down W9 forms, it’s important to know that you must make at least three attempts to contact the contractor. You’ll need to reach out to them at least three times with proper documentation to show that you’ve made a reasonable effort to obtain the form. If these attempts fail, you could be forced to report non-compliance, which could further complicate your situation.
The Long-Term Benefits of Collecting W9s
While it may seem like a simple step to skip, requesting W9 forms from contractors early on has significant long-term benefits. By taking care of this upfront, you avoid the stress and confusion of scrambling to gather necessary information when tax season arrives.
Moreover, keeping all your contractor records up-to-date and organized ensures you won’t face unnecessary complications during audits or when filing your taxes. It also allows you to maintain a good relationship with your contractors, as they will appreciate your attention to detail and professionalism.
What If You Don’t File 1099s?
Ultimately, you can choose to forgo filing 1099s; however, this can lead to serious consequences. If your business is ever audited, the failure to file required 1099s can result in significant penalties. Whether you are filing an 1120-S for an S-Corp, a 1065 for a partnership, an 1120 for a C-Corp, or a Schedule C for a sole proprietorship, you are required to confirm that you have issued all 1099s that were necessary.
If you answer “yes” on your tax return and the IRS discovers you missed filing 1099s during an audit, the penalties can be steep. If you answer “no,” it could automatically trigger an audit. And if you select “not applicable,” it raises a red flag for the IRS, which could lead to further scrutiny.
Conclusion: Stay Ahead of the Game
In conclusion, ensuring that you have W9 forms on file before paying any contractor is an essential step in staying compliant with tax regulations. It’s a simple process that can save you time, headaches, and potentially costly penalties. By gathering W9 forms before contractors begin their work for you, you’ll be ready to file accurate 1099s and keep your business’s financials in order.
So, next time you hire a contractor, make sure you request the W9 form right away. Your future self will thank you when tax season rolls around!
Check out our YouTube video Why you should ensure you have a W9 on hand before paying a contractor with James for a first-hand recap. If you are still determining which plan works best for you, need additional help, or have any questions, Waterford Business Solutions is happy to help. Feel free to call us at 864-351-0852 or email us at Info@WaterfordBusiness.com.
