The W-9 form is a crucial document that vendors and independent contractors must complete correctly to ensure their payment and reporting requirements are met. Despite its apparent simplicity, errors on the W-9 form are common due to the complex IRS tax code regulations and the 6 pages of instructions. Taxpreplv.com was created to help vendors complete a correct and complete W-9 form.
The most common mistakes on the W-9 form include leaving the name blank, not signing the form, not checking the tax classification, disregarding entities, and forgetting to include the type of LLC. Taxpreplv.com provides a guided process to ensure the user completes each required field and avoids these common errors.
#1 – The name on line 1 of the W-9 form is blank
At times vendors can become confused between the names on line 1 and line 2. They can mistakenly fill in only the business name on line 2 and leave line 1 blank. Line 1 is the legal name that the business or individual uses on their federal tax return and is required by the IRS. It is imperative that the name on Line 1 and the taxpayer identification number (typically an EIN or SSN) given on the W-9 form match to the IRS’s records. This will ensure that the IRS can apply any 1099 information received to the correct taxpayer account. If they don’t match, the IRS won’t have confidence in the information provided and will send an error notice back to the reporting company. This could lead to a 24% deduction in the vendor’s payment moving forward to satisfy IRS backup withholding requirements.
When using our guided form in Taxpreplv.com, the user is required to complete line 1. It is a required field and the user cannot continue to the next section until complete.
#2 – The W-9 form is not signed
Not all W-9 forms are required to be signed, but the best practice is to require that all vendors sign them unless the company understands all the situations in which a signature is required. Vendors send in W-9s that aren’t signed and the accounting department at the company receiving the W-9 doesn’t always check for this.
When using our guided process in Taxpreplv.com, a signature can be required when a W-9 form is sent to your vendor. As an added benefit, one user can complete the W-9 form and then send it to another user to sign.
#3 – The tax classification is not checked
Another mistake we see is a W-9 form without any tax classification checked. Line 3 of the form requires that the person completing the form check the appropriate box for the federal tax classification of the entity or person noted on line 1. This helps the company making the payment to the vendor determine if the payment is reportable on a 1099 form. Without this information, the company will have to assume 1099 is required for all reportable payments made to the vendor. They won’t be able to exclude entities, like corporations, that are often exempt from receiving 1099s.
The first step users must do when creating a W-9 form in Taxpreplv.com is to select their tax classification. They are not able to move to the next step without selecting a valid option.
#4 – Disregarded entity used on line 1 of the W-9 form
One of the most misunderstood concepts of the W-9 form is a disregarded entity. And consequently, because companies don’t understand this concept, listing the disregarded entity on line 1 is one of the biggest mistakes made on W-9 forms. When the disregarded entity name and TIN is then reported on 1099 it can lead to the reporting company receiving a large number of CP2100 notices from the IRS. These notices require the company to request a new corrected W-9 form from their vendor or start backup withholding 24% on the vendor’s future payments.
A disregarded entity is an entity that the IRS “disregards” for tax purposes or completely ignores. The IRS looks to the owner of the entity and all the tax liability flows to the owner of the entity. The best example is an LLC that is owned by one individual. The IRS “disregards” the LLC and requires that the individual owner’s information be provided on the W-9 form. For more information on disregarded entities, see our blog article, What is a Disregarded Entity?
When creating an electronic W-9 on Taxpreplv.com users work through a multi-step process to determine if they are a single-member LLC. If they determine that this is the case, Taxpreplv.com directs them to use the owner of the LLC on the W-9 form. This process helps to reduce the number of disregarded entities listed on line 1.
W-9 form mistake #5 – The type of limited liability company is not provided
The number one mistake we have seen vendors make on a W-9 form is forgetting to include the type of LLC. This is critical as it determines whether the LLC can be treated like a C or S corporation for 1099 reporting purposes. Most payments made to C or S corporations are not required to be reported to the IRS on 1099. However, payments made to LLCs that are partnerships or owned by an individual person are often reported.
One of the steps that users are guided through when completing a W-9 on Taxpreplv.com is to select the type of LLC that they have. We ask them if they have filled out Form 2253 or 8832 with the IRS to be taxed as an S Corp or C Corp. If they select one of these options, we note their LLC tax classification as S or C respectively. If they have not filed either form, we then ask them if they are a single or multi-member LLC. Multi-member LLCs are treated as a partnership and single-member LLCs are asked to use the owner’s information.
The W-9 form is an essential document that vendors and independent contractors must complete correctly to ensure their payment and reporting requirements are met. Common mistakes on the W-9 form include leaving the name blank, not signing the form, not checking the tax classification, disregarding entities, and forgetting to include the type of LLC. Taxpreplv.com provides a guided process to ensure the user completes each required field and avoids these common errors.
What is the most common mistake on the W-9 form?
The most common mistake is leaving the name on line 1 of the W-9 form blank.
Why is it crucial to provide the correct name on line 1 of the W-9 form?
Providing the correct name on line 1 is crucial as it must match the IRS’s records to ensure the proper application of 1099 information.
Why is it important to check the tax classification on line 3 of the W-9 form?
It helps the company determine if the payment is reportable on a 1099 form and excludes exempt entities from receiving 1099s.
Why should all vendors sign the W-9 form?
It’s best practice to require all vendors to sign the W-9 form to ensure the company understands all situations where a signature is required.
What is a disregarded entity on line 1 of the W-9 form?
A disregarded entity is an entity that the IRS “disregards” for tax purposes, such as an LLC owned by one individual.
What is the biggest mistake made on W-9 forms regarding disregarded entities?
Listing the disregarded entity on line 1 can lead to the reporting company receiving a large number of CP2100 notices from the IRS.
Why is it important to provide the type of LLC on the W-9 form?
It determines whether the LLC can be treated like a C or S corporation for 1099 reporting purposes.
What are the consequences of not signing the W-9 form?
The company may not be aware of the situations where a signature is required, leading to errors and complications.
What is Taxpreplv.com?
It’s a website that provides a guided process for vendors to complete a correct and complete W-9 form.
What are some common mistakes that Taxpreplv.com can help vendors avoid?
Taxpreplv.com can help vendors avoid common mistakes such as leaving the name blank, not signing the form, not checking the tax classification, disregarding entities, and forgetting to include the type of LLC.