In the fourth quarter, accounts payable personnel must start planning for annual payment information reporting responsibilities, also known as 1099s. If you follow this newsletter regularly, you know what that entails. However, if you are new to 1099s or accounts payable (AP), here is essential information.
Organizations, including not-for-profits as well as businesses, must report certain payments made to individuals and entities. There are many details on just what you must report. (A place to start is the Instructions for Forms 1099-MISC and 1099-NEC.)
But our focus today is on obtaining the information you will need from your payees to comply with the reporting requirements, and the best way to do that is IRS Form W-9.
What is Form W-9?
Form W-9 is an IRS form for requesting and documenting tax-related information from vendors, specifically a vendor’s legal name, tax identification number (TIN), and tax classification. Tax classification means what type of entity the vendor is, for example, a sole proprietor, partnership or corporation. That information is vital in determining whether your payments to it are reportable to the IRS.
Now, if you follow best practices recommended by VendorInfo, you are gathering W-9s (and W-8s for non-resident aliens/foreign payees) at the start of the vendor relationship. But as the IRS points out, you at least should request the W-9 from a vendor before making a payment to it.
Why Get Form W-9?
Getting the W-9 is part of the vendor validation process. You need the information in the W-9 as you set up the vendor in the vendor master file to assess whether to flag the vendor for payment reporting and whether you need to do backup withholding.
Ideally, you want to get a W-9 at the start of the relationship for several reasons. First, as stated, it’s part of validating the vendor, as it captures the legal name, which you can cross-check with business incorporation or other documents.
Also, the beginning of the relationship is when you will have the most leverage with the vendor. Giving you a TIN is often not a high priority for a vendor unless it is a condition of setup and getting paid! If a vendor does not provide its TIN, you may have to begin backup withholding payments to the vendor.
When you get the W-9, you want to verify the information. VendorInfo strongly recommends checking vendor names and TINs through the IRS TIN Matching program (and does this automatically for VendorInfo users).
How Form W-9 Saves Time and Money
According to the IRS, obtaining a W-9 saves you money by enabling you to avoid civil penalties for failing to file a required form 1099 or filing a 1099 with missing or incorrect information. That’s certainly true and important, even if it is a “negative” kind of savings!
But getting a W-9 upfront saves in other ways. By obtaining the correct information upfront, you avoid the administrative costs of backup withholding, including tax deposits and IRS Form 945 filing. You also avoid scrambling when it’s time to prepare 1099s—the information you need is already in your system. You don’t have to chase vendors to get the data from them.
So now you know what a W-9 is, why you need it and the reasons for getting one from each vendor early in the relationship. But back to the fourth quarter of the year: it’s time to check your vendor master for any information gaps and contact any vendors with missing information.
For information on how VendorInfo can help you gather W-9s and verify their information, contact us.