October 15, 2024
As tax season gets closer, businesses across the country are scrambling to get their paperwork in order. One of the most critical pieces of documentation for any company paying contractors is the IRS Form W-9, yet too often this step gets neglected until it’s too late. If you're managing contractors, the importance of having W-9s on file before issuing payments can't be emphasized enough.
Why You Need a W-9 Before You Pay a Contractor
When a business hires a contractor, the paying business is responsible for reporting those payments to the IRS through Form 1099-NEC (Non-Employee Compensation) if they exceed $600. Where this often goes sideways is when payments are made to the contractor before a W-9 has been obtained. As you may have experienced, once paid, some contractors disappear into night air.
Without a W-9, you are likely unable to complete the 1099, potentially exposing your business to penalties or additional scrutiny from the IRS. The IRS 1099-NEC filing deadline falls at the end of January (January 31, 2025, for the 2024 tax year), which makes January a pressure-filled month of chasing contractors for information they should’ve provided upfront. In worst-case scenarios, contractors might “ghost” you, hoping to slip through the cracks and avoid being reported to the IRS altogether.
The Risk of Skipping W-9s
Failing to collect W-9s upfront can be costly. Aside from penalties for late or incorrect 1099 filings, you may be required to make 24% backup withholding payments to the IRS on future payments made to the contractor. If you didn’t withhold the tax and can’t track down the vendor later, your business is still on the hook for that liability.
Cleaning House - Steps to Take NOW If You Don’t Have W-9s on File
Take Inventory: Review all payments made year-to-date to contractors. If you haven’t collected a W-9 for any contractor paid for services, prioritize those vendors immediately.
Send a Request ASAP: Reach out to vendors with a formal W-9 request letter or email. Make it clear that this information is required for IRS reporting purposes and should be submitted as soon as possible. Include a deadline well ahead of the 1099 filing cutoff (January 31 for the IRS).
Follow Up: Persistence pays off. If your initial request doesn’t get a response, follow up with a phone call. Sometimes vendors just need a little nudge.
Backup Withholding: If you can’t get a W-9 in time, consider implementing IRS backup withholding on future payments to the vendor. Let them know that failure to provide a W-9 will result in withholding 24% from future payments.
Don’t Wait Until the Last Minute
With the 1099 filing deadline looming, now is the time to make sure all your documentation is in order. Don’t let vendors slip through the cracks—especially those who might avoid their tax responsibilities. Proactive W-9 collection will ensure a smooth 1099 season, helping you to avoid penalties.
Be smart about it—get those W-9s in order now, before you’re left chasing ghosts come January!