Employers who contract with freelancers and independent contractors, also known as W-9 employees, must collect W-9 forms from each one of these entities. Companies collect these forms in order to accurately report the W-9 employee's tax information. However, a W-9 can also be used to report the following:

  •          Income paid to a contracted employee.
  •          Real-estate transactions.
  •          Mortgage interest payments.
  •          Acquisition and abandonment of secured property.
  •          Debt cancellation.
  •          Contributions made to an IRA.

The most common reason that businesses request an employee to sign a W-9 is to ensure that the employee’s tax identification number is correct so they can properly report the employee's earnings for the year.

Independent contractors typically have to fill out a W-9 before doing work for a company. Individuals who fill out a W-9 don’t typically have any of their money contributed to Social Security and typically don’t receive benefits.

Companies commonly issue a 1099 tax form at the end of the tax year to report all the gross payments made to employees who filled out a W-9 prior to employment.

Essential Information About the W-9

A W-9 is typically needed when a company needs to report any earnings or losses that will affect the federal tax return of a contracted employee. Companies provide forms to employees, such as the 1099 form, to document that employee’s earnings. These 1099 forms are filed with the IRS but, before that can be done, the employer needs to have the employee’s correct taxpayer identification number to generate the forms. That identification number is completed using a W-9 form, making the W-9 necessary before the company can create variations of the Form 1099.

Employees who sign a W-9 are typically subject to different rules with regard to withholdings. The W-9 does not arrange for taxes to be withheld, so it is up to the employee, as identified by their taxpayer identification number on their form, to set aside money for services such as Social Security. The 1099 that is created from the W-9 is typically only created after the employee has earned at least $600 during the course of their employment.

Signing the W-9

As mentioned above, the employee contracted with a company is the only one who should sign the W-9, applying their W-9 form signature to finalize the document after providing their personal and business details. Completing the W-9 is fairly straightforward.

After entering your name, you’re responsible for entering your business name (if it’s different from your legal name). If you do business as part of a limited liability company, then you will enter your “disregarded entity” name.

You will need to list what type of business you are, such as sole proprietorship or limited liability company, and then list the exemptions that you’re subject to. In most cases, individuals do not list any exemptions. The exception is when the employee being paid is exempt from backup withholdings, in which case they need to provide an “Exempt payee code,” which is varies depending on the organization.

If a payee is exempt under the Foreign Account Tax Compliance Act, they will also need to enter a code. It should be noted that neither of these exemptions typically apply to independent contractors and freelancers.

You will then need to provide the address you will use on your tax return, and you may choose to list the address of the organization requesting your W-9. Finally, you will provide your tax identification number, which is your Social Security number unless you have an employer identification number.

The last thing you need to do before signing off on the document is attest to the truthfulness of all the information in the W-9. With that completed, you can sign the document and return it to your employer.

The only person legally able to sign the W-9 is the independent contractor or that contractor's legally appointed designee.

Companies and W-9s

The W-9 requirements for corporations and other business structures are straightforward. Companies are required by law to gather taxpayer identification information and generate a 1099 for their contracted employees. Sometimes, the contractor refuses to provide a current W-9 with accurate information. If the identification number is wrong, then the company should begin backup withholdings. This amount is generally 28% of all payments that are made to the payee.

When an identification number is marked incorrect by the IRS, the employer is notified with a CP2100 or CP2100A form, which documents the wrong information that was filed. Within 30 days, the employer is required by law to begin backup withholdings. As a result, it is in the best interest of the contractor to return their W-9 form with all of their information accurately documented, particularly their taxpayer identification number.

Other Reasons for W-9s

While it is true that W-9s are most commonly signed by individuals contracting with employers, there are several other reasons why a W-9 might be necessary. From real estate to IRA contributions, W-9s also need to be signed in a variety of other circumstances. A W-9 is necessary in almost all cases to help provide the correct taxpayer identification number for the person involved in the transaction.

Real Estate and Mortgage Interests

Closing a deal on real estate can include filling out a W-9. For instance, if you’re taking out a mortgage loan to finance a home purchase, you need to complete a W-9. Because mortgage interests are deductible on federal income tax returns, the W-9 needs to be filled out to document the mortgage loan and document your tax identification number. If the mortgage is held by a private party, then the private party also needs to fill out a W-9 to document the signing of the loan. The W-9 also needs to be filled out to document any income earned on real estate transactions.

Dealing With Secured Property

Secured property is any unmovable property, such as land or a house. When a person borrows money to purchase property, they sometimes have to transfer ownership of that property to the lender. This occurs when a home goes into foreclosure. At other times, a person abandons the property. In either case, the law requires the abandoned property to be treated as a sale of the property.

The taxpayer identification number of the person transferring the property needs to be provided through a W-9. A form 1099-A, Acquisition or Abandonment of Secured Property, also needs to be completed. This form is provided by the lender and signed by the borrower.

Cancelling Your Debts

There are time when a creditor relieves a debtor of their debt obligations. However, in several instances, the amount of debt cancelled is taxable. As such, the correct taxpayer identification number needs to be provided on a W-9 form. However, the creditor also needs to send the debtor a Form 10999-C, Cancellation of Debt. This form show the amount of debt that was cancelled and the date of the cancellation.

Contributions to an IRA

An individual retirement account, or IRA, is an account into which individuals put money for savings. The three main types of IRAs include traditional, Roth and Rollover IRAs. Regardless of the type of IRA, a person needs to make contributions into the IRA.

A Traditional IRA takes contributions from money that may be deductible on a tax return while a Roth IRA receives contributions from money that’s taxes have already been paid on. Rollover IRAs are typically transferred from an old, employer-sponsored retirement account.