Year-end Reporting Tips #1: Documenting Independent Contractors and Vendors

In order for tax payers to protect themselves from IRS penalties, it is important to collect a Form W-9 from all workers and vendors.   While not required, it’s highly recommended for two reasons:

  1. The Form W-9 provides proof that the information on an issued 1099 is as represented by the vendor. If the IRS determines that the 1099 is incorrect and imposes a penalty, the W-9 shows that the misinformation came from the vendor and thus shifts the penalty to the vendor.
  1. It is also important to collect the W-9 before any payments are made to the vendor. If the W-9 is not provided, a percentage of the payment, or a backup withholding, must be withheld and remitted to the IRS and FTB.  There are penalties to the tax payer for failure to do the backup withholding.

For more information on how the IRS defines employee versus independent contractor, please review the following summary.