Protect Your Business (and Your Contractors) with Forms W-9 and W-8 BEN
We are fast approaching the end of the year. Which, among other things, means we are fast approaching the time when accountants everywhere start gearing up to prepare client Forms 1099 for the 2022 tax year.
So if your accountant starts asking you if you have W-9’s and W-8BEN’s for all of your independent contractors, know that they are thinking ahead to the year-end tasks that keep you, as a business owner, in compliance.
Compliance isn’t the most thrilling concept. And remembering to collect all of those Forms W-9 and W-8BEN throughout the year, from each new independent contractor, just seems to be a bit of a hassle, for both you and them.
So do you really need to do it?
As a CPA, I could remind you that the IRS does look at compliance issues. And that they have just recently been authorized to hire potentially thousands of new agents and auditors, thanks to the recently-passed Inflation Reduction Act of 2022.
But perhaps more importantly than that, these forms (W-9 and W-8 BEN) protect both you and your independent contractor.
How, you ask? Let’s take a closer look.
Form W-9 and W-8BEN: What are they?
These forms are used for more than one purpose. But for business owners, they are used primarily to obtain the correct taxpayer identification number, business name, business entity type and address for any business or individual you make payments to for services.
Form W-9 is used to collect such information from US citizens, US resident aliens, or businesses organized and operating under the laws of the US.
Form W-8 BEN is used to collect similar information for foreign contractors.
What does obtaining these forms from your contractors protect you from? IRS penalties.
Business owners are required to file certain information returns annually. These include filing Forms 1099-NEC (short for Non-Employee Compensation) for any person or business you paid at least $600 to during the year for business services.
To file these, you need the sort of information you would find on a W-9 or W-8 BEN.
Penalties for not filing Forms 1099-NEC or for filing incorrectly include:
- $50 to $280 per form for not filing by the filing deadline.
- Minimum $570 per form, or 10% of the income reported on the form, for failing to provide a correct form to your independent contractor (or other vendor)
Those penalties will increase in 2023. And this doesn’t even include interest that the IRS charges on top of penalties.
If you have several vendors or contractors you pay more than $600/year and you fail to file these forms or provide them to your vendor/contractor, those penalties can really add up!
The solution: request a W-9 or W-8 BEN from each vendor and contractor when you start working with them and keep those forms updated.
Bonus: The IRS does NOT require you to file 1099’s for certain business entities in certain circumstances. The W-9 has handy checkboxes that tell you exactly what type of legal entity your vendor or contractor is. If they checked the right boxes, you don’t even have to worry about filing.
What does obtaining these forms from your contractors protect them from? Backup withholding.
If your vendor/contractor puts up a fuss about providing you with a Form W-9 or W-8 BEN, you can let them know about backup withholding.
What is that, you ask?
In certain situations where you pay another person for services to your business, you as the payor may be required to withhold a certain percentage of their payments, which you will report and submit to the IRS.
These situations include:
- Any US person or business for whom you have an missing or incorrect Taxpayer Identification Number (whether a Social Security Number or an Employer Identification Number)
- Any resident or nonresident alien for whom you have a missing or incorrect ITIN (Individual Taxpayer Identification Number)
- Any foreign person or business who does not claim tax treaty benefits on a Form W-8 BEN.
For the first two categories above, the backup withholding rate is 24% of your gross payment to them. For foreign persons, the backup withholding rate is 30% of the gross payment.
If you remind your contractors that filling out a simple form can prevent you from being required to hold back 24-30% of their vendor payments, they will most likely be motivated to fill those out quickly!
If you are a client and your Customer Ally checks with you about these forms, know that we are looking to protect your business and your contractors. If you are not a client yet, check out our website to learn more.