What You Need to Know Before You Sign a W-9 Form

If you are self-employed and receive over $600 in a year from an individual or business, the payer must provide you with a Form 1099-NEC to verify your income to the IRS. Before your client can prepare your Form 1099 you must give them a valid taxpayer identification number. The form used to collect information is Form W-9. 

What is Form W-9?

Form W-9 is a tax document that must be signed by independent contractors to provide a taxpayer ID number (Social Security Number or Employer ID). If the employer doesn't have a taxpayer ID, or if the taxpayer ID is incorrect, the independent contractor must have federal income taxes withheld, known as "backup withholding."

Form W-9 is a standard tax document often utilized in business and financial transactions. So by itself, a W-9 doesn't pose many problems. Still, there are some things to be aware of.

Provide Your Business Information

Form W-9 requires you to include information on your business type. 

The IRS has somewhat simplified Form W-9. To complete the new W-9, follow these steps: 

1. Make sure you are entering your taxpayer ID correctly and that you are entering the correct taxpayer ID. The main purpose of the form is to verify this information. The questions may come when your business is an LLC. A single-member LLC files federal income tax returns as a sole proprietor, and multiple-member LLC files as a partnership.
2. You will be asked if you are subject to backup withholding. Most people are not, but if you have questions, you should learn about backup withholding.
3. You will be asked if you are subject to reporting foreign assets (called FATCA reporting). Unless you have assets in a foreign country, this section won't apply to you. 
   

FATCA

FATCA is the Foreign Account Tax Compliance Act that requires foreign financial institutions and other non-financial foreign entities to report on foreign assets held by U.S. account holders. On Form W-9, some individuals may have to report foreign income through the FATCA process. Most individuals and businesses are exempt from this reporting requirement. The certification section includes a statement that you are exempt from this requirement. If you aren't exempt, you'll need to provide additional information.

Backup Withholding

Backup withholding is required for a variety of reasons. The most common reason for backup withholding is if the signer of the W-9 doesn't have a valid taxpayer ID number or the number is missing. If you submit a W-9 without a valid taxpayer ID, or if your tax ID is invalid, your employer will be required to withhold federal income taxes from your payments at a flat 24% rate.

Protect Your Information

The W-9 contains sensitive information that should be kept private and secure. Don't send your completed W-9 as an unsecured or unencrypted email attachment. Instead use secure methods of transmission, such as hand delivery, mail, or encrypted file attachments to an email to the person who requested it.

Receiving a W-9 When You Expected a W-4

If you are starting a new job and your new employer hands you a W-9 to fill out, ask if your new job is as a self-employed contractor or as an employee. Employees fill out the Form W-4 to set their tax withholding level.

Self-employed persons (independent contractors) don't have income taxes or Social Security/Medicare taxes withheld. You and your employer can discuss the issue of your status, but it's the IRS that ultimately decides whether a worker is an employee or an independent contractor (self-employed).

Frequently Asked Questions