Business owners are required to file information returns informing the IRS of how much money they paid to other companies or individuals throughout the year in the form of non-employee compensation.
As a business, you collect the taxpayers social security number (SSN) or taxpayer identification number (TIN) from the W-9. The independent contractor/non-employee also provides a contact address on the W-9.
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If a non-employee you have engaged to do work on an independent basis refuses to provide you with a completed W-9, there are several steps you must take to ensure that you are in compliance with IRS regulations.
Repeat the Request
If the independent contractor refuses to provide a completed W-9, attempt to contact them and explain the consequences of failure to comply with this IRS regulation for independent contractors. By informing them that they may be subject to a $50 fee from the IRS for failing to provide either their Social Security number (SSN) or taxpayer identification number (TIN), this may entice them to comply.
Additionally, let them know that once you file their information returns without a TIN, the IRS will require you to begin backup withholding on all future payments to them.
A failure to respond to a request for a W-9 may be due to your having outdated or inaccurate contact information for the contractor. Verify contact information or try an alternative contact method.
Begin Backup Withholding
Backup withholding is an amount that you, the payer, withholds from any future payments you might make to the contractor in question.
The backup withholding rate is 24 percent, beginning in 2018. You are required to deposit this money to the IRS.
These funds ensure that the IRS receives the amount it is due on this income, since there may be issues with its correct reporting on the individual's tax return. Once the contractor provides you with the TIN, you may discontinue backup withholding.
File Your Forms
Even if a non-employee fails to provide you with a TIN, you must still file the required information returns, such as a 1099 or a 1098. On these forms, you can either leave the TIN number field blank or write "Refused to provide." The IRS will then send a notice requiring you to begin the backup withholding for the payee.
You will also be required to make at least three attempts over the next two years to access the information from the company. Be sure to document these attempts for your records in order to avoid a penalty from the IRS.
Avoiding the Problem
Overall, the best course of action is to avoid the problem of refusal in the first place. When hiring a contractor or freelancer always have him fill out a W-9 prior to beginning any work.
If he refuses to provide his TIN, do not allow him to work.
If you have reason to suspect that an individual may have given you false information, you can verify Social Security numbers or TINs with the Social Security Administration online through their website.