With the gig economy steadily expanding, knowing the status of your workers can guide you in preparing applicable tax forms because companies must provide statements to their workforce and report their transactions to the IRS.
What is the purpose of a W-9 tax form?
Form W-9 allows the independent contractor to communicate their
Tax Identification Number (TIN), which is also known as an Employer Identification Number (EIN) or a Social Security Number (SSN), to an individual, business, or financial institution. Since contractors pay their own taxes on income, ensuring you have their TIN assures you run your business compliantly.
The purpose of the Internal Revenue Service Form W-9 Request for TIN and Certification is to give your business (the payor) the information it needs to report earnings during the tax year for tax purposes. Ideally, an independent contractor submits Form W-9 to their payor before starting a project/gig and then receives a 1099 back after a payout of $600 or more.
In terms of tax paperwork, it’s relatively painless, so a freelancer should voluntarily send a completed W-9 to each client with whom they do business. Form W-9s rarely vary by the employer; hence, freelancers
can quickly and easily transmit the completed form.
Is there a deadline for collecting a W-9?
Without a completed W-9, you cannot report earnings on Form 1099,
which has a set deadline for the end of January. Encourage your contingent workforce to complete form W-9 before starting a project for you. Then you can send them their 1099 tax forms ASAP.
Does the IRS need a copy of Form W-9?
Only the employer that made the W-9 request requires a copy; the IRS
Avoiding W-9 Identity theft for freelancers
The type of data exchanged on a W-9 can lead to identity theft and should be safeguarded accordingly. Inform your freelance community if they have doubts regarding a W-9 that someone has sent them to fill out, or requested from them, to inquire about which tax forms they intend to receive back once the W-9 is completed.
Freelancers should use secure methods of communication to deliver Form W-9 like a hand delivery to a trusted client, physical mail, or password-protected file attachments within an email.
Freelancers can also request to utilize substitute Form W-9s as long as it satisfies official IRS requirements. Note that all information must still be accurate under the penalty of perjury.
Worker classification & trying not to confuse the W-9 and W-4
W-9 forms are used by freelancers, also known as independent contractors (ICs), self-employed consultants, vendors, and other assorted titles. Simply speaking, if a non-employee worker earns more than $600 in a year, they should complete a W-9 prior to doing business.
Has your company sent a W-9 form request to its full-time employees rather than a W-4? Then you’ve probably designated your full-time workers as ICs, and you may have people working for you who are improperly classified. Yikes!
Read “Top 8 misclassification myths and what to watch out for” for more information about misclassification.
W-9 vs. W-4 tax withholding
You will not withhold any taxes from freelancers, as they alone are in charge of ensuring that the IRS gets the correct amount of taxes from their income. In contrast, you’ll ask full-time workers for Form W-4 during onboarding, so you know how much in taxes to withhold from their paychecks.
Information required for an accurate W-9
There is specific information required for an accurate W-9 to be completed, such as the legal name of the payee or their lawful business name — the payee's current mailing address in its entirety and a correct TIN, EIN, or SSN.
The freelancer must also identify how they intend to file their taxes: Individual/sole proprietor, single-member LLC, LLC, C-corporation,
S-corporation, partnership, trust/estate, or other filing options.
Remember that the W-9 safeguards a client from paying unauthorized freelancers who may be involved in crimes like money laundering, tax evasion, or worse. Receiving an accurate W-9 is like a badge that says that freelancers operate as upstanding businesses and are safe to pay.
What happens when your enterprise does not obtain Form W-9?
You’ll be responsible for paying the 24% flat rate from or in addition to the contractor’s earnings until you can obtain a completed W-9.
No matter what, the government always gets its money; therefore, you or the paid freelancer will be responsible for paying taxes on income paid out for the outsourced work. If the IC fails to provide a correct TIN, EIN, or SSN, they’ll find themselves (along with you) on the hook for paying the backup withholding rate of 24% on the income you paid them as a freelancer.
The W-9 is essential because of what it represents - it is official documentation. Therefore, it can serve as a paper-trail-protection for the entity in the event of W-9 absence or falsification.
What happens to the freelancer if they fail to provide Form W-9 to the payor?
The freelancer can be fined if they refuse to provide a W-9.
Backup withholding for absent W-9s
According to the IRS, “even if the payee gives you an awaiting TIN (EIN/SSN) certificate, you must backup withhold on reportable... payments if the payee does not certify, under penalties of perjury, that the payee is not subject to backup withholding.” Additionally, “If you do not collect backup withholding from affected payees as required, you may become liable for any uncollected amount.”
Check out this IRS page to learn more about who is subject to backup withholding.
Avoid owing tax money to the government.
To avoid costly misclassification, consider understanding how Worksome Classify can help recommend accurate worker classification in only minutes, not months. With Worksome, tax documents are assigned based on a classification recommendation, and then the respective tax forms are kept on file.
Overall, taxes can be a significant source of stress for many employers, as the repercussions of not filing them with proper worker classification in place are a fiscal drain. Worksome ensures our clients have compliantly received W-9s, and other legally necessitated tax forms, protecting you and the freelance community from misclassification and negligent tax filing.
If there is uncertainty around misclassification, consider letting Worksome walk you through a free demo on how we recommend accurate worker classification to you.
This article isn’t intended to give you legal or tax advice. Please consult your CPA or attorney for more information.