Americans who are self-employed or work as freelance contractors don't regularly withhold money on their paychecks to pay the IRS. As a result, they have to use a different set of forms to report their income and pay their taxes. The W-9 affects independent contractors because it gives their clients the information required to report payments to the IRS. Filling out an inaccurate or incomplete W-9 could result in inaccurate earnings reports, which might lead to problems with the IRS -- including possible tax evasion charges.
The Purpose of the W9
Businesses use W-9 forms to collect information they are required to report to the IRS about contractors they've paid throughout the tax year. Traditional employees fill out a different form, the W-2, and withhold money from each paycheck that goes to the IRS as a payment for a portion of that year's tax bill.
Independent contractors don't participate in withholding, but the IRS still wants its cut. Companies collect personal and business information from contractors via the W-9 form, and use that information to tie the amount paid a contractor to a specific individual, This allows the IRS to track how much money a contractor has earned. The contractor then receives a 1099-MISC at the start of the following year that documents how much he was paid, and submits that information to the IRS when filing his return.
W-9 and Potential Penalties
Lying on a W-9 form, such as by providing a false name or Social Security number, is akin to lying to the IRS. That is perjury, a federal offense punishable by a fine and up to five years in prison.
Misleading the IRS on a W-9 form, if successful, would allow a taxpayer to avoid declaring income received. Failing to report income is a crime punishable with fines up to $250,000 and five years in prison.
Contractors who receive money under a W-9 don't have any automatic withholding, but they're still responsible for paying income tax. The IRS requires most contractors to estimate their income tax amounts and make payments to the IRS on a quarterly basis.
Quarterly tax payments can be avoided if your income is less than $6,000 a year, but most contractors will need to write a check to the IRS once every three months.
Not all W-9 forms are as they appear to be. Scambusters reports that since 2002 criminals have used fake IRS forms that look like W-9s to collect Social Security numbers from victims. The criminals then use the Social Security numbers to open credit cards and bank accounts in the victims names.
Nick Robinson is a writer, instructor and graduate student. Before deciding to pursue an advanced degree, he worked as a teacher and administrator at three different colleges and universities, and as an education coach for Inside Track. Most of Robinson's writing centers on education and travel.