One way many employers, including nonprofits, are dealing with a tight labor market is to engage independent contractors. If your organization is considering hiring freelancers, first get a grip on the paperwork you’ll need. — including IRS Form W-9, “Request for Taxpayer Identification Number and Certification.”
W-9 basics
Form W-9 collects a contractor’s federal tax classification, such as individual, corporation or partnership. This is essential to determine what you’ll need to report to the IRS. The contractor will also provide its Taxpayer Identification Number (TIN). For an individual, this is the person’s Social Security number or, in some cases, individual taxpayer identification number. A business will report its employer identification number. You’ll need to include this information when you file Form 1099-NEC, “Nonemployee Compensation,” which is used to report payments for services by nonemployees you’ve paid at least $600 during the tax year.
If a contractor doesn’t provide a correct TIN or doesn’t sign the certification in Part III of Form W-9, you’re generally required to “backup withhold” on reportable amounts. That means you must withhold and pay to the IRS 24% tax from future payments to the individual. If you fail to do so, the IRS may hold your organization liable for any uncollected amount.
The IRS will send you a backup withholding notice if a payee’s name and TIN on a Form W-9 don’t match its records. If you receive a notice, you may have to send a “B” notice to the contractor to solicit another TIN.
Track these tasks
To stay compliant with IRS requirements, it’s important to make collecting a completed Form W-9 part of your onboarding process for independent contractors. The best practice is to secure it before work begins or the contractor submits any invoices.
Also, remind sole proprietors to furnish their names. A business name or “Doing Business As,” is not enough.
Be proactive
The IRS website offers a free TIN matching service (search “e-services” at irs.gov). Payers and authorized agents can match TIN and name combinations with IRS records before submitting forms. The IRS says using the service reduces backup withholding and penalty notices.
While W-9s are top of mind, review your records and confirm you have current forms for all your existing contractors. Consider sending an annual notice to all of your independent contractors reminding them to help you keep their forms updated. If an entity type or owner has changed, contractors need to provide new forms.
Records retention
Retain W-9 forms for at least three years after the last tax year for which you filed a Form 1099-NEC for the contractor. In general, the IRS limits audits to returns filed in the previous three years.
