Many employers, including nonprofits, are turning to independent contractors and freelancers as a way to deal with the continuing tight labor market. If your organization is among them, you need to take steps to ensure you collect the necessary paperwork — including IRS Form W-9, “Request for Taxpayer Identification Number and Certification.”

In a nutshell

As its title suggests, Form W-9 is what you use to collect an individual or business’s Taxpayer Identification Number (TIN). In the case of an independent contractor who does work for your organization, the TIN will be that person’s Social Security number or, in some cases, Individual Taxpayer Identification Number.

You’ll need the information contained in Form W-9 when you file Form 1099-NEC, “Nonemployee Compensation.” You must use Form 1099-NEC to report payments for services by nonemployees you’ve paid at least $600 during the tax year.

If a contractor doesn’t provide a correct TIN or doesn’t sign the certification in Part III of Form W-9, you’re generally required to “backup withhold” on reportable amounts. That means you must withhold and pay to the IRS 24% tax from future payments. If you fail to do so, the IRS may hold your organization liable for any uncollected amount.

The IRS will send you a backup withholding notice if a payee’s name and TIN on a Form W-9 don’t match its records. If you receive a notice, you may have to send what’s called a “B” notice to the contractor to solicit another TIN.

Best practices

The easiest way to stay on top of your Form W-9 obligations is to make completion of the form part of onboarding new independent contractors, before they’ve even submitted an invoice. If they drag their feet on submitting the form, make clear that they can’t begin working for you until you have the completed and signed form in hand. It’s a good time to confirm that you have current completed forms for all of your existing contractors, too.

The easiest way to stay on top of Form W-9 obligations is to make completion of the form part of onboarding independent contractors.

When you do receive a Form W-9, take the time to review it. If you need additional information, request it from the contractor immediately to help preempt IRS penalties. Note that sole proprietors must furnish their individual names, not just a business name or “Doing Business As.”

You’d be wise to take advantage of the free TIN Matching service on the IRS website (search “e-services” at irs.gov), rather than simply waiting to see if the IRS sends you a notice about a Form W-9. The IRS allows payers and their authorized agents to match TIN and name combinations with IRS records before submitting forms so they can follow up with the individual if there’s a discrepancy. The agency has indicated that payers who use the service will receive fewer backup withholding notices and penalty notices.

Also send an annual notice to all your independent contractors. The notice should remind them to keep their forms with you up to date. If they’ve undergone some change — such as a change in entity type or owner — they need to provide a new form.

Records retention

You should retain W-9 forms for at least three years after the last tax year for which you filed a Form 1099-NEC for the contractor. The IRS usually limits its audits to returns filed in the previous three years, although it can add more years if it finds a substantial error.