Rules on the W-9 for the IRS

Rules on the W-9 for the IRS
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Anytime employment or the exchange of money for services occurs, the IRS wants to know about it. Standard permanent employees typically fill out the W-4 form, but independent contractors and the firms that hire them for short-term work are subject to a different set of rules. Understanding these requirements and how to use the W-9 form will help both employers and contractors to avoid tax complications.

Purpose of the Form

When a firm or employer hires someone to provide services as an independent contractor, it must provide the worker a W-9 form to formally request a taxpayer identification number (TIN). The contractor provides the correct TIN, typically his Social Security number, and sends the W-9 back to the employer, who then sends the completed form to the IRS. The contractor providing the TIN must be a U.S. citizen or resident alien or a partnership, company, corporation or an association run in the United States.

Backup Withholding Rules

The W-9 form also allows taxpayers to indicate whether or not they are subject to backup withholdings. Backup withholdings are portions of payments that an employer gives to the IRS directly. Common payments subject to backup withholding include payments from interest, dividends, broker exchange transactions, rent and royalties. However, payments as a result of a real estate transaction do not require withholding. The IRS also takes backup withholding in the case that a payee does not give the proper TIN to the employer.

Details of the Form

When filling out the W-9, the payee or contractor will include his name and business name if applicable and mark whether he is an individual or sole proprietor, C or S corporation, partnership or an estate. The form also includes a space to enter an address and any account numbers associated with the payer-payee agreement. The contractor may check the "Exempt payee" box if he is exempt from backup withholding. Part I contains a space for entering the taxpayer identification number as well as the employer identification number.

Due Dates and Penalties

Employers typically give contractors a W-9 at the time of employment. The payee then has 60 calendar days to complete the form, provide the correct TIN and return it to the requester. If a contractor does not provide the correct TIN, he may incur a $50 penalty fee. If the contractor claims to be exempt from backup withholdings without proper justification, he may incur a $500 penalty fee.