Disclaimer: Bonsai is not a law firm, does not provide legal services or advice, and does not provide or participate in legal representation
Many people tend to confuse tax evasion and tax avoidance, yet the difference between the two is pretty simple; tax evasion is illegal and tax avoidance is legal as the legal use of law to avoid paying certain taxes. Tax evasion can lead to you being fined a penalty by the courts or being imprisoned. As a business, you do not want all the money earned in profits to go to sorting out legal matters brought about by tax evasion. As such, it’s important to ensure that any business, you transact is recorded and the right amount of tax deducted and issued to the Internal Revenue Service (IRS). It is a requirement by law for businesses to request for a vendor W9 form, from their employees or contractors. However, there is an exception of some non-profit or for profit organizations.
Vendors can easily download the vendor W9 form from the IRS website. The four paged document is easy to fill and comes with instructions on what’s required. There are several fields that you will be required to fill after which you will then submit the form to the company you will be offering your services to. The business will only make the request once unless of course the name of your business or individual name changes. In the vent you change your name or business name, you will be required as the vendor to fill out a new vendor W9 form and issue it to the business. The vendor W9 form contains the name, address, taxpayer identification number and the federal tax classification bracket. Seeing that the information on the vendor W9 is quite sensitive as it has a vendor’s Social Security Number or their Employer Identification Number, it’s very important for both parties; the giver and the recipient; to keep such documents safe to avoid cases of identity theft.
The business that made the request for the vendor W9 form doesn’t issue it to the IRS, but instead uses the information on the form to account for any payments made to the vendor. This way, they keep a record of their business expenses and in case the IRS chooses to audit them, they have proof of payments made. The vendor W9 form helps ensure that you do not give business to individuals or corporations that do not have a taxpayer identification number which is a breach of the federal law. As a business, it is a requirement by the federal law to withhold 28% of tax and pay it to the IRS for any payments made to a vendor that are $600 or more in any given tax year. This is known as the backup withholding and the IRS will always inform you if you are subject to the backup withholding. It then becomes the responsibility of the vendor to inform the recipients of their vendor W9 form, whether they are subject to the backup withholding or not.
Looking at the penalties involved in the event one is found guilty of tax evasion, many companies have made it compulsory for self-employed individuals or corporations; with the exemption of public companies; to issue a vendor W9 form before any payment is issued to them for services offered. This is to ensure they are in compliance with the law and to issue the right records in the event of an IRS audit. Freelancers, contractors or independent consultants, top the list of those who will be required to fill out the vendor W9 form.
They are not fully employed by the business, but are required once in a while to offer their expertise and services to companies. However, in the event you get a request for the vendor W9 form, make sure that the individual or corporation is genuine, so that your personal information does not end up in the wrong hands.