Businesses most commonly use IRS form W-9, Request for Taxpayer Identification Number and Certification, to get information from vendors they hire as independent contractors (also called freelancers). When a business pays an independent contractor $600 or more over the course of a tax year, it is required to report these payments to the IRS on an information return called form 1099-MISC. Businesses use the name, address and Social Security or tax identification number from form W-9 to complete form 1099-MISC.
Businesses that hire independent contractors do not withhold income tax or pay Medicare or Social Security taxes for their independent contractors, as they do for their employees; contractors are responsible for these obligations. However, the IRS still wants to know how much these contractors are being paid to make sure contractors pay the taxes they owe, and it uses form 1099-MISC to gather this information. Businesses do not send form W-9 to the IRS.
Form W-9 asks for the independent contractor’s name; business name (if different); business entity (sole proprietorship, partnership, C corporation, S corporation, trust/estate, limited liability company or “other”; and the business’s tax identification number (or Social Security number, for sole proprietorships that don’t use a separate tax ID number). Form W-9 also asks the person filling it out to certify that he or she is exempt from backup withholding. Most taxpayers are exempt, but if they aren’t, the company hiring the independent contractor will need to withhold income tax from that contractor’s pay at a flat rate of 28% and send it to the IRS.
Since form W-9 requires listing a tax ID or Social Security number, both the person filling it out and the company receiving the completed form must guard the form carefully to protect against identity theft.
When You Shouldn't Fill Out a W-9
An independent contractor who receives an unexpected W-9 should hesitate before filling it out and research whether the requester has a legitimate reason to ask for this form. Financial institutions sometimes use form W-9 to request information from a customer when they need to report dividends or interest. But be careful here: The financial institution should probably already have your tax ID number from when you opened the account.
Another situation in which you should hesitate before filling out form W-9 is if the company asking you to fill it out is your employer and you are supposed to be classified as an employee, not an independent contractor. The difference is substantial.
Employee or Independent Contractor?
If you’re an employee, your employer will withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on your wages. If you’re an independent contractor, it won’t. That means you’ll be responsible for the employer’s share of Social Security and Medicare taxes, and that you won’t be eligible for unemployment compensation if you are laid off.
An unscrupulous employer might try to classify an employee as an independent contractor to save money. If you’re misclassified as an independent contractor, your employer’s “savings” will come out of your pocket. If you’re an employee, you should fill out form W-4, not form W-9. (See The Purpose of the IRS W-4 Form for more information.)
It isn’t always clear whether a worker is an employee or an independent contractor, but in general, the more control the business has over what workers do and how they do it, the more likely it is that they are employees. If your Spidey sense starts tingling when someone who hired you calls you an independent contractor, that’s a good sign you should investigate the situation further. Start with the IRS discussion of the difference between the two.
The Bottom Line
It's important to fill out the W-9 correctly – but only if you're sure it's the right form to submit.
For more information on tax forms, check out What is IRS Form W-2 used for? and What's the difference between IRS Forms 1040EZ and 1040A?