Updated: March 7, 2019

The IRS Form W-9 tax form is vital for small business owners. You’ll need this whenever you hire an independent contractor for your business. Let’s go over what this means for you.

What is a W-9 tax form?

The W-9 form requires the contractor to list his or her name, address, and taxpayer ID number. For sole proprietors, the taxpayer ID number is often their Social Security number. It could also be the EIN.

How is a W-9 used?

Your business uses the W-9 tax form to:

  • Collect taxpayer identification data you need to complete IRS information returns due January 31 each year
  • Avoid backup withholding

The W-9 tax form can also show the legal organization of the contractor’s business. Legal business entities include sole proprietor, C Corporation, S Corporation, Partnership, or Limited Liability Company. Signing the W-9 form certifies that the information on the document is correct. This falls under the penalty of perjury.

What is the difference between a 1099 and a W-9?

Use the 1099 tax form to report certain kinds of income. Use the W-9 tax form to get information from the vendors that they hire as independent contractors. The 1099 goes to the IRS, while the W-9 doesn’t (simply keep it for your files).

Who must fill out a W-9 tax form?

Typically, the business hiring an independent contractor or freelancer will have that person to fill it out.

How do I know if an independent contractor was hired?

You need to correctly classify your worker as an employee or independent contractor to avoid IRS penalties. Use the economic realities test to help you decide. The economic realities test looks at six factors that can help define an independent contractor vs. employee.

An independent contractor is a self-employed individual or someone who works for a different business. They are hired to accomplish a task, but they are not included on your payroll. You do not withhold any taxes from their pay because they must pay self-employment tax.

When independent contractors begin performing work for your business, they must fill out Form W-9. This form gives you information that will help you stay compliant with the IRS.

Form W-9 instructions

It’s essential to understand the instructions when filling out Form W-9. Here are the pieces of information that independent contractors must provide:

  • Name
  • Business name if different than the name
  • Business entity (sole proprietor, LLC, C corporation, S corporation, partnership)
  • Exemptions
  • Address
  • Taxpayer Identification Number (Social Security number or Employer Identification Number)
  • Certification: signature and date

How to complete form 1099-MISC

Whenever you hire an unincorporated independent contractor to whom you pay $600 or more by check or cash during the year, you must file a 1099-MISC form reporting the payments to the IRS by January 31. The information on the completed Form W-9 will enable you to complete the 1099-MISC correctly.

How to avoid backup withholding

If you don’t obtain a record of an independent contractor’s taxpayer ID number, you may be required to do back-up withholding. Backup withholding is like employee withholding. You have to withhold 24 percent of all payments over $599 you make to the vendor. Remit the money each quarter to the IRS.

You deposit backup withholding payments separately from the payroll tax deposits you make for employees. Backup withholding is not required if the contractor is incorporated or a limited liability company (LLC).

If you fail to do backup withholding when required, on audit, the IRS may impose an assessment against you equal to 24 percent of what you paid the contractor. You’ll avoid this if you have a completed Form W-9 on file.

Stephen Fishman

Stephen Fishman

Stephen Fishman is a self-employed tax expert and regular contributor to MileIQ. He has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for entrepreneurs, independent contractors, freelancers and other self-employed people. He is the author of over 20 books and hundreds of articles, and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Visit Fishman Law and Tax Files for more information on his work.
Stephen Fishman