When you work with contractors, freelancers, or other vendors, it’s easy to jump right into paying their invoices and moving on. Before you do, there’s one critical step that can save you headaches down the road: collecting a Form W-9.
What is a W-9?
A W-9 is a simple IRS form that asks for key information from your vendor, including:
- Their legal name and business name (if different)
- Their business structure (individual, LLC, corporation, etc.)
- Their Taxpayer Identification Number (TIN) or Social Security Number (SSN)
This information helps you (and the IRS) correctly report payments at the end of the year.
Why Do I Need to Collect a W-9 Before Making Payments?
1. Required for Tax Reporting
If you pay a U.S.-based vendor $600 or more in a calendar year, you are generally required to issue them a Form 1099-NEC at year-end. The information from their W-9 is what goes on that 1099. Without it, you can’t properly file.
2. Avoiding IRS Penalties
If you don’t file a 1099 when required, the IRS may penalize your business. Penalties can add up quickly, especially if you have multiple vendors missing documentation.
3. Preventing Backup Withholding
Without a valid W-9, the IRS requires you to withhold 24% of the vendor’s payment (known as “backup withholding”) and send it to the IRS instead of the vendor. This creates unnecessary complexity and can strain your relationship with the vendor.
4. Protecting Your Business in an Audit
If the IRS audits your company and finds missing W-9s, you could be held liable for unpaid backup withholding, penalties, and interest. Having W-9s on file shows you’re compliant.
Best Practice: Collect the W-9 First
A W-9 may seem like just another form, but it’s an important safeguard against IRS issues and year-end scrambling. The easiest way to avoid problems is simple: make it your policy to collect a W-9 from every new vendor before you issue any payment. This ensures you always have the right information ready if you need to file 1099s, and you won’t be chasing down vendors in January when deadlines are tight. By collecting it upfront, you’re protecting your business, staying compliant, and saving yourself time and stress. If you want this off your plate, Burkland’s startup tax team can set up a W-9-first process and manage 1099s for you. Contact us to request more information.