Startup Law: What can you do if a contractor (who you have already paid) is avoiding your requests to sign a W9?

Kruze Consulting Startup Q&A Author
Vanessa Kruze Founder, CPA

Technically you’re supposed to get a W-9 before you pay the person/entity… but startups move fast. If they are now refusing to provide a W-9 you should stop paying them immediately and document your requests to obtain the W-9 in writing. Failing to report contractor payments could cost you $1,060 in penalties – per contractor. ($530 intentional failure to file penalty applied to both the contractor copy and the IRS copy of the Form 1099). Ultimately, the contractor is responsible for reporting ALL their income on their tax return.

Here are some 1099 FAQs:

Who should be issued a 1099?

You must file a Form 1099-MISC for each vendor in the course of business to whom you have paid in the year at least $600 in rents, services performed by someone who is not your employee (including parts and materials), prizes and awards, payments to attorneys, or other income payments. This includes LLC’s, LLP’s, LPs, contractors, sole proprietors, partnerships, landlords, and lawyers.

Who does NOT need to be issued a 1099?

You do not need to issue a 1099 for international contractors (you should instead collect a form W-8BEN/W-8BEN-E), corporations, S corporations, payments for merchandise /telephone/freight/storage, payments to real estate agents or property managers, employee wages, business travel allowances, employee expense reimbursements, tax-exempt organizations, and payments made with a credit card, payment card, and certain other types of third-party network transactions (These will need to be reported on a 1099-K issues by the payment settlement entity).

What is the penalty for not filing a 1099?

It is required by the Internal Revenue Service. Congress has substantially increased penalties for businesses who fail to comply with the 1099 filing rules. Failing to report contractor payments could cost you $1,060 in penalties – per contractor. ($530 intentional failure to file penalty applied to both the contractor copy and the IRS copy of the Form 1099). Furthermore, you may also face additional penalties for incorrect 1099’s. If you go under audit and the IRS finds that you should have provided a 1099 to a vendor but did not, they can deem the expense non-deductible which can result in the company having to pay more taxes.

What is a W-9 form/is it required?

When a business pays $600 or more over the course of a tax year, it is required to report these payments to the IRS on an information return called form 1099-MISC. Usually, businesses use the name, address, and Social Security or tax identification number from the form W-9 are used to verify the information and to complete form 1099-MISC.

What is the difference between a 1099 and a W-9?

The difference between 1099 and a W-9 is that while the W-9 form is used to request the business name, address and TIN (Tax -payer Identification Number) the 1099 form is used to actually report certain kinds of income other than regular wages. You cannot receive a 1099 before obtaining the necessary information from the W-9.

What is the W-8BEN(E) Form?

The W-8BEN(E) form is collected by us for our records and is a liability protection for the company. The W-8BEN is for foreign individuals while the W-8BEN-E is for foreign entities. The W-8BEN is a form that certifies that your international contractor is not a U.S. Citizen and not subject to U.S. Withholding Tax. The W-8BEN-E is a form that certifies the foreign status of the company for income tax, tax treaty benefits, and FACTA purposes. These forms are valid for 3 years. Failing to collect a W-8BEN(E)? For qualifying vendors outside of the U.S., if we do not have a foreign vendor’s assertion of treaty benefits through the W-8BEN(E) form, the company is generally required to withhold 30% of all payments made to him/her for “backup withholding”(for vendors inside the US who refuse to provide an SSN with a W-9, the rate is 28% in 2017, but reduced to 24% in 2018). The company is legally required to submit these backup withholding amounts to the IRS (even if they failed to withhold from the contractor). This backup withholding would be submitted on payroll tax Form 945.

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Kruze Consulting is a leading provider of accounting, finance, HR and tax consulting to venture capital funded startups. Kruze’s clients have raised over half a billion dollars in financing in the past 12 months, and the Kruze team takes pride in setting up systems that prepare startups to successfully navigate venture capital due diligence.

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