Outsourcing work to independent contractors has a myriad of advantages, but what should you do if a contractor refuses to fill out Form W-9?
The IRS has guidelines you can follow to protect your business from contractors that don’t want to give you the information you need to file federal taxes.
It’s important to be aware of the significance of Form W-9 for the federal tax filing process from the beginning of a business collaboration because it will help you avoid a potentially complex situation further down the road.
Let’s look at what you can do if a contractor refuses to give a W-9 and how you can file taxes even if you don’t have all the information you need.
Table of Contents
What is Form W-9?
According to the IRS, the purpose of Form W-9 is to ‘provide a correct Taxpayer Identification Number to the person who is required to file an information return to the IRS.’
For instance if you’re running a burger business and you buy patties from a contractor who isn’t your permanent employee, you’ll have to ask them to fill out Form W-9.
This form is commonly used to report:
- The income paid to you.
- Mortgage interest you paid.
- Contributions you made to an IRA.
- Real estate transactions.
- Abandonment or acquisition of secured property.
The IRS offers clear guidelines regarding when a business has an obligation to request a W-9. In addition, you can use the Instructions for the Requester of Form W-9 document to find out how to enable contractors you’re working with to file a Form W-9 electronically.
Using W-9s
The information a contractor or a freelancer provides on a W-9 is used to fill out Form 1090-NEC. Businesses must keep these forms as their financial records and they’re not required to file them with a tax return.
However the IRS can request access to these documents during an audit or any other type of review of a business’s financial records.
A correctly filled out Form W-9 should contain:
- Contactor’s full name.
- The name and type of a business.
- Address, city, state, and zip code details.
- Exemptions.
- Taxpayer Identification Number (SSN or EIN).
- Signed certification.
Please remember that the IRS updates Form W-9 and Form 1090-NEC and that you must ensure you’re using the most recent version of these forms.
The Three Solicitations
In a perfect world, obtaining Form W-9 from a contractor should be a routine request. However, contractors, vendors, and freelancers can have different reasons to refuse to fill out this form.
That’s why you should have written proof that you attempted to acquire Form W-9 from a contractor. The IRS refers to these attempts as solicitations.
The first solicitation should take place before a job starts or shortly after. If a contractor doesn’t respond to your request you should send the so-called first annual solicitation by December 31 of the year in which the collaboration started.
The contractor should receive the first annual solicitation by January 31 if you started working together in December of the previous year.
The third and final request you must send to a contractor is called the second annual solicitation and you have to send it by December 31 of the following year.
Taking Preemptive Action
Besides sending the three solicitations and using them as proof you attempted to get Form W-9 from a contractor, there are several other things you can do to deal with this situation.
As outlined in the Backup Withholding for Missing and Incorrect Names/TINs, you should start withholding 24% of the sum you pay to a contractor if they don’t fill out Form W-9. You can report the funds you withhold on Form 945 to the IRS.
You must file Form 1099-NEC for each vendor or contractor you paid more than $600 over the course of a year even if you don’t have their SSNs or TINs.
Filling Out Form 1099-NEC Without TIN or SSN
E-Filing Form 1090-NEC electronically isn’t an option if a contractor refuses to provide their SSN or TIN. The IRS won’t let you submit an incomplete digital form which is why you must use its paper version.
Write the word ‘Refused’ over the TIN/SSN section of the form and then send copies to the IRS and the contractor.
Don’t forget that you still have to file Form 1090-NEC even if you don’t have the information you need and failing to do so is likely to result in a penalty.
What to Do If You Forget to Ask a Contractor to Give you W-9?
Situations where contractors refuse to give you W-9 don’t happen often, so you shouldn’t be concerned if you forgot to send the first solicitation when the job started.
Most freelancers and contractors will fill out Form W-9 as soon as you ask them to. The important thing is to make a request before the filing season starts because you won’t be able to file a tax return if you don’t have the SSNs or TINs of all your contractors.
Once again these forms are for your use only, and you don’t have to show them to the IRS unless you’re asked to.
Potential Penalties
Your business and contractors that refuse to provide their TINs can be subject to penalties for failure to fulfill information return obligations. The official IRS documents refer to businesses as payors while contractors, freelancers, or vendors are referred to as payees.
You may face penalties under the following circumstances:
- Failing to provide all information on an information return – Form 1099-NEC you file must contain a payee’s TIN, address, name, and other mandatory information. You must use the form’s paper version if you don’t have a payee’s TIN and write the word “Refused’ over the designated field. You’ll also have to provide evidence that you attempted to collect a payee’s TIN to avoid a penalty.
- Unauthorized use of payee’s TIN- A business may face civil or criminal penalties for improper disclosure or abuse of information a payee included on Form W-9.
Payees who refuse to give W-9 could face the following penalties:
- Providing inaccurate information on Form W-9 – All information payees include on Form W-9 must be accurate. Falsifying information on this form can result in criminal charges.
- Refusal to provide TIN – Payees might face a $50 penalty if they refuse to provide their TINs.
- Offering fake information to prevent withholding – A $500 civil penalty can be assigned to payees that give payors false information to stop them from withholding 24% of their wages or salaries.
Please note that these aren’t the only penalties payors or payees might face if they misuse or falsify information on Form W-9 because we covered only the most common penalties applied in these situations.
Frequently Asked Questions
You must file Form 1099-NEC even if you don’t have a contractor’s TIN because you’ll face civil or criminal penalties otherwise.
You don’t have to terminate your collaboration with a contractor that doesn’t want to fill out Form W-9. However, you have to document their refusal and submit several Form W-9 requests.
You don’t have to request Form W-9 from a contractor if the total annual value of the job doesn’t exceed the $600 mark.
Only US citizens and green card holders can fill out form W-9, which is why you must check if a contractor is a US resident before hiring them.
Reach Out to a CPA
Resolving the situation where a contractor won’t give you Form W-9 can be difficult because you can’t always know their motivation. However, you’re unlikely to face any penalties if you make timely W-9 requests and withhold a portion of their salary you then delegate to the IRS.
Visit choicetaxrelief.com or call 866-8000-TAX to schedule a free consultation with a CPA if you don’t know how to fix the problem with a contractor that refuses to give you Form W-9.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
