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What Contractors and Businesses Need to know about Form W-9 and the IRS

In recent years, the IRS has taken steps to better regulate independent contractors by monitoring the proper registration of Forms W-9 and 1099. Previously, these independent contractors or vendors were not properly filing their W-9s and therefore not properly paying taxes on services provided to businesses. W-9s were often not filed on time, and usually without the correct identification information such as the tax identification number (TIN). So, in order to modify this problem, the IRS has increased the number of audits they perform on small business owners as well as increased the penalty fee for incorrect W-9 forms. Going forward, the IRS is now encouraging businesses to file their W-9s electronically on their easily accessible Website to help avoid inaccurate tax claims.

As the responsible party to pay taxes, it is critical that the contractor avoid making any errors when preparing their W-9. They must include their name and business name (if different), correct TINs (i.e., Social Security or Employer Identification Numbers), operating address and type of organization. When incorrect Social Security numbers (SSNs) or Employee Identification numbers (EINs) do not match, the name listed on the tax return, the IRS doesn’t know which identification to use when comparing data.

In summary, the IRS is cracking down on independent contractors after receiving years of W-9s filed incorrectly. The IRS is performing more payroll audits and issuing higher penalty fees when the contractor is in the wrong. Contractors must file their taxes differently than corporate employees. Form W-9 must be filed correctly and include accurate information. Contractors should file and pay quarterly tax estimates to avoid penalties and interest for their income tax liabilities. Unlike corporate employees, these contractors don’t pay taxes out of each payment received, they pay at year-end. Errors in the W-9 form could create an overcharge on taxes or no charge at all, prompting the IRS to audit the contractor. If you have any questions or concerns about tax reporting for independent contractors, please contact us.