A W-9 is often needed from a vendor that your company does business with. Laura Glennon, founder of Navitance, discusses when to obtain a W-9, as well as when to issue a 1099. Listen or read more to find out about W-9 forms and collecting them from vendors.
John Maher: Hi, I’m John Maher. I’m here today with Laura Glennon, founder of Navitance, which provides a full array of financial, accounting, bookkeeping, outsourced CFO consulting, and financial restructuring advisory services for non-profit organizations, start-ups, and established businesses. Welcome, Laura.
Laura Glennon: Thank you, John. It’s my pleasure to be here.
John: Laura, today, we are talking about W-9 forms and collecting them from vendors. Maybe you could start off by explaining, what is a W-9?
Laura: A W-9 is a form that is issued by the Internal Revenue Service. You can go on to irs.gov and download the latest version. A W-9 is a form that companies need to send to their vendors to ask the vendors to complete them and sign them.
When to Obtain a W-9
John: If I’m the owner of a company, say, and my bookkeeper is starting to get after me to collect these from all of my vendors, when does that happen typically in the year? Why is my bookkeeper pushing me to get this done?
Laura: The very best time to obtain a signed W-9 from a vendor is before first payment is ever made to that vendor. After payment is made, unfortunately, if you are working with an unscrupulous vendor who doesn’t want their income to be reported, you may have a very difficult time getting it. The W-9 serves a few different purposes. The person who signs it has to certify that they are not subject to backup withholding from the IRS. That’s a very important piece.
The second part is what type of a business is the vendor? How is it legally established? Is it a sole proprietorship? Is it a partnership? Is it a limited liability company? Is it a C-corp? Is it an S-corp? Depending on what boxes the vendor clicks off, then that helps the bookkeeper determine whether or not a 1099 is required to be sent to that vendor.
John: Explain just briefly the 1099. You send that to the vendor, and that gives them a record of how much you as a company have paid that vendor over the course of the year. Is that right?
Laura: That’s right. The W-9 is a form that’s kept internally, so you don’t need to send that back to the IRS. You keep that in your files. Actually, a lot of vendors that need 1099s are unincorporated, so a Social Security number likely is their taxpayer ID number. Because of that, there is a privacy and a security issue that those forms would then need to be maintained in locked filing cabinets.
John: Interesting. Explain again, with a W-9 form, those are for subcontractors, is that right? Not employees who are working full time for your company.
Laura: Correct. Employees, when they start, they would need to undergo the hiring process; filling out an I-9 and a W-4 to let you know how much to withhold for federal withholding and state withholding. A W-9 is a form that is used to determine whether or not a vendor is incorporated or unincorporated and if that vendor needs a 1099 issued. There are only a couple of exemptions for the 1099s: municipalities, non-profit organizations, 501(c)(3)s, C-corps and S-corps.
John: Those are the types of corporations that don’t require a 1099?
Laura: Right. The important thing is the information is what type of entity and even a sub-entity, because an LLC could have an underlying entity structure of a partnership or a corporation. Depending on the entity structure — and there is also a threshold of how much an unincorporated vendor you can pay without having to issue a 1099. That’s $600 for services. We’re looking for unincorporated vendors that provided services to you in a calendar year, then their income would be reported on the 1099.
John: If it’s over that $600 in a year.
1099 and IRS Rules
Laura: Right, yes. There is a caveat. The Internal Revenue Service, the rules around 1099s change quite often, and so we have to keep up and current on that. Attorneys, interestingly enough, whether or not they are incorporated, they still need a 1099. I’m not sure what the IRS is thinking where they’re targeting that group, but that comes up very often.
Another question from our clients is, “I’ve never heard of this, why do have to do this?” Another question is, “It’s my landlord, I’ve never heard of needing to report rent.” Even we’ll get calls from our client’s landlord saying, “I’ve never had to do this.” I said, “Well, fill out a W-9, and we’ll know whether or not we have to report you.”
John: We’ll figure it out.
Laura: Yes, we’ll figure it out.
Other W-9 Requirements, and Penalties, to Keep in Mind
John: What are some of the other things that a company needs to do in order to satisfy all of the IRS requirements for a W-9?
Laura: They’re required to obtain the signed W-9. Once you have it once, unless the company’s legal structure changes, say, they are doing businesses in the beginning, and then they become a C-corp or an S-corp, or an LLC later, well, then you would need a new W-9. Once you have the original one, it’s fine, just file it away.
You would then enter information into your accounting software to help that accounting software know the amount of what to report, and then also, how to fill out that form.
Accounting software like QuickBooks has it already figured out and there are certain ways of entering that information into the software.
John: Are there penalties for a company that doesn’t handle their W-9s properly?
Laura: It’s penalties on the 1099. The IRS wouldn’t really ever know whether or not a company is —
John: — Because it’s an internal document.
Laura: — It’s an internal document. On all corporate tax returns, so LLCs, S-corps, C-corps, partnerships, there’s two questions. Number one, “Did you compensate any vendors which require a 1099? Yes or no?” You say, “Yes.” Then, “Did you issue those 1099s?” If you have answered “Yes” to both of those, then hopefully, you have really gone through, scoured your general ledger, and made sure that you’ve identified all the vendors, you have their taxpayer IDs, you know how much you’ve paid them, and you report it, and you report it on time.
The deadline is January 31st of every calendar year, so 31 days after the previous calendar year. You are looking at cash bases, so how much you paid to a vendor within that previous year.
John: That’s really great information, Laura. Thanks again for speaking with me today.
Laura: Thank you.
John: For more information, visit the Navitance website at navitance.com or call 978-809-3282.