Insights

Forms W-9 Collection, Validation & Downstream Information Reporting

Understanding the importance, process, and benefits of properly documenting user accounts for U.S. businesses

By: Erin Fennimore

VP of Tax Solutions

Published on:

If a U.S. business facilitates payments to individuals or other businesses, then it is likely subject to tax information reporting. The first step in fulfilling this key regulatory requirement is collecting and maintaining specific demographic information about the recipient of the payment (“payee”). 

While legally required for only certain payment types, generally, the best practice for successful tax information reporting is collecting, validating, and managing Forms W-9 for each payee. 

Documenting payees is no small feat and even the most sophisticated enterprises can struggle with the tax information reporting process, the purpose of this article is to help understand what A Form W-9 is, documentation best practices, and the connection to information reporting. 

What is a Form W-9?

Form W-9, officially titled as the  "Request for Taxpayer Identification Number and Certification," is used to request vital information from U.S. payees (individuals or entities) – such as their name, address, and certified taxpayer identification number (“TIN”).  For individuals, a TIN is generally a social security number (“SSN”) or an individual taxpayer identification number (“ITIN”), while for entities it’s an employment identification number (“EIN”).  A U.S. payee in this context, generally means being a U.S.person - i.e. a U.S. citizen or permanent resident and for entities it is being incorporated or registered in the U.S.

Who Needs to Request a Form W-9? 

The requirement to collect a Form W-9 depends on the type of payment being made. If a business facilitates securities transactions, interest, or dividend payments (which are subject to Form 1099-B, DIV, and INT reporting), that business is required to solicit and collect a Form W-9 from its payees at account opening. The enterprise is required to collect a Form W-9 because it must collect a “certified TIN” which can only be accomplished via a Form W-9.  

For other payment types, ultimately reported on Forms 1099-MISC, NEC, K, etc. — a certified TIN is not required. However, it has become the industry standard for high-volume 1099 filers to collect Forms W-9. The collection of data under penalties of perjury has a direct correlation to the completeness and accuracy of the data collected.   As a result, Form W-9 collection should be an integral part of most enterprises’ onboarding process to collect the most accurate information possible.

Collection vs. Validation

When collecting a Form W-9 (manually or electronically), it is one thing to simply receive the information from the payee, but it is another to validate that the information is correct and properly documents the respective account.  Validation in this context means to make sure the information on the form correlates to the account information for the payee (primarily name and TIN), and the basic fields on the form overall make sense in that entities are providing  EINs and individuals are giving SSNs for example. 

The completion of an accurate Form W-9 can become quite complex in situations where account holders are single-member LLCs or disregarded entities.  

Other things, such as having a proper signature and date, should also be considered and confirmed in order for the form to be considered “valid.”  The importance of having these validation checks is discussed in greater detail below, but without a system in place, any kind of validation can be challenging especially if that validation process is performed manually.   

Name and TIN Matching 

The Name and TIN on a Form W-9 should always be matched against the IRS TIN Matching system. When utilizing the TIN Matching System, the IRS will tell you whether the name/TIN combination was a match to the IRS database or not.

While there is no requirement to perform this matching exercise, it is an important proactive measure to confirm whether the payee information on file is in sync with the IRS or not. The reason this is important is that the IRS will perform this same check once a 1099 is filed.  For those 1099s that have a mismatched name/TIN, the IRS will then issue a B-Notice and 972CG Notice that outline the steps that need to be taken to both rectify the situation and assess potential penalties for the inaccurate filings.  

If businesses know ahead of time that the name and TINs they are listing on their 1099s aren’t accurate, it allows them to start the remediation process prior to receiving those B Notices, and can greatly reduce the potential need to apply backup withholding and the associated filing penalties. As a result, it is certainly best practice to have TIN matching as part of the W9/8 documentation process. 

What is a Form W-9 ultimately used for? 

Unlike Forms 1099, a Form W-9 is not submitted to the IRS.  Instead, the form is stored by the requester and kept on file in the event the IRS needs to confirm the requester is properly documenting its payees.  A payee might request a copy of the form they submitted, but there is no requirement to distribute them like 1099 recipient statements.

Beyond documenting payees, it is also a best practice to use the data collected on the Form W-9 to populate the payee’s 1099s.  Again, this is because the information is provided under penalties of perjury, which therefore should be the most accurate, and thus less prone to errors.  

There is however a chance that the account information on file for the payee might not match exactly what is listed on the Form W-9.  As a result, some sort of reconciliation process/policy should be established to ensure the payee’s information is as accurate and up-to-date as possible.  This could include prompting payees to update their account information if the Form W-9 contains conflicting information or having a payee submit a new Form W-9 if the account information is updated after the Form W-9 was submitted.  

Regardless of the approach, the Form W-9 should serve multiple purposes and should not just be seen as something that happens during onboarding.

TaxBit as the industry-leading solution

As the critical first step in fulfilling information reporting, enterprises should carefully review and implement processes for documenting payees via Form W-9 collection and validation. As regulatory requirements continue to evolve, businesses should be prepared for tax information reporting that will grow by orders of magnitude.

TaxBit’s industry-leading Digital W9/W8 solution enables a streamlined data collection workflow for new and existing customers to collect, store, remediate issues and verify US customer tax identification numbers (TINs) with the IRS – enabling modernized information reporting that can streamline the complete compliance process.

From Form W9 to the 1099 and all B Notice management in between, TaxBit’s end-to-end platform helps industry leaders solve compliance complexity

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