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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. ($630 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. If a contractor refuses to provide a W-9, you, as the startup, may be subject to backup withholding. Basically, the IRS wants to get paid, if it looks like the contractor isn’t going to do it, you will have to - and the backup withholding rate as of the middle of 2024 is 24%.
Here are some 1099 FAQs:
Who should be issued a 1099?
You must file a Form 1099-NEC or 1099-NEC (depending on the services they provided) 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. If a contractor refuses to provide a W-9, you should document your request and consider backup withholding. Independent contractors are also subject to these rules.
1099-NEC vs 1099-MISC
Always consult with your CPA, as there are nuances and the IRS’ rules change (they changed in the year 2020, for example). But in general, the two different forms are used in the following circumstances:
- Form 1099-NEC is used for:
- Services performed by someone who is not your employee (including parts and materials)
-
Payments to attorneys for legal services
- Form 1099-MISC is used for:
- Rents
- Prizes and awards
- Other income payments
- Royalties of $10 or more
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 if a Contractor Refuses to Provide a W9?
If a contractor refuses to provide a W-9, you should document your request and consider backup withholding. You want to do this for a couple of reasons - you want to avoid IRS penalties, which can be big, and you want to make it easier to justify the expense (which will reduce your firm’s income tax). Independent contractors are also subject to these rules. This ensures compliance with federal law and helps avoid civil and criminal penalties.
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. ($630 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. The IRS website provides detailed information on these penalties. Civil and criminal penalties may also apply for such failure.
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-NEC. 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-NEC. If a contractor refuses to provide a W-9, you may need to consider backup withholding. The form W-9 is essential for ensuring that the business complies with federal law and tax responsibilities.
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 (Taxpayer 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. If a contractor refuses to provide a W-9, you should document your request and consider backup withholding.
Backup Withholding
You may need to consider backup withholding if a contractor refuses to provide a W-9. Backup withholding ensures that the appropriate taxes are paid to the IRS, even if the contractor does not comply with tax reporting requirements. As of mid-2024, the backup withholding rate is 24%.
Backup withholding can be a crucial step for a business owner to ensure compliance with federal law and avoid penalties. The Internal Revenue Code mandates that businesses must withhold a percentage of the payment to the contractor and remit it to the IRS when the contractor fails to provide a taxpayer identification number (TIN) or if the IRS notifies you that the TIN is incorrect. This process protects the business from civil and criminal penalties associated with failing to report payments correctly.
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. If you are hiring contractors abroad, consider using an international payroll service, many of which can support contractors as well - they can take care of this paperwork as part of their service.
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