Why You Should Collect a W-9 from a Contractor Before Making Any Payment
When working with independent contractors, proper documentation is not just good practice — it’s a necessity. One of the most important steps in this process is collecting a completed IRS Form W-9 before making any payments. While it may seem like a simple administrative task, obtaining a W-9 in advance protects your business from compliance risks, reduces administrative headaches, and ensures smooth tax reporting.
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Ensures Accurate Tax Reporting: At the end of the year, businesses must issue Form 1099-NEC to any contractor who has been paid $600 or more. This form reports the contractor’s income to both the IRS and the contractor. Without a completed W-9 on file, you won’t have the correct legal name, taxpayer identification number (TIN), or business classification needed to complete the 1099 accurately. Errors in reporting can lead to penalties and IRS scrutiny.
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Reduces Risk of IRS Penalties: Failure to issue 1099s correctly or on time can result in significant IRS penalties. If you make payments without having a W-9 on file and are unable to complete required reporting later, your business could face fines for incomplete or incorrect information returns.
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Avoids Backup Withholding Complications: If a contractor does not provide a valid TIN via a W-9, the IRS requires that you withhold 24% of their payment for backup withholding and remit it to the IRS. This creates additional complexity and administrative burdens. Collecting a W-9 beforehand helps you avoid backup withholding obligations altogether.
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Verifies Contractor Status and Legitimacy: A completed W-9 helps confirm that you are working with a legitimate business or individual and provides documentation of their tax status. This protects you from inadvertently misclassifying workers and ensures that you are dealing with vendors who meet IRS documentation requirements.
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Streamlines Year-End Processes: Chasing down W-9 forms at the end of the year is inefficient and can cause unnecessary stress during tax season. Having all forms on file in advance allows you to focus on timely and accurate reporting without last-minute surprises.
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Protects Your Business in Case of an Audit: In the event of an IRS audit, having a completed W-9 on file demonstrates that you have taken proper steps to comply with tax reporting requirements. It helps provide a clear paper trail, supporting your business’s diligence and accuracy.
Conclusion
Collecting a W-9 from every contractor before issuing payment is a small but essential step that safeguards your business. It ensures tax compliance, reduces administrative burden, and protects you from costly penalties. By making this part of your standard onboarding process, you can save time, avoid errors, and keep your business on solid ground.