If you are a business corporation occasionally hiring individual contractors, you know that you’re always required to file information returns to the IRS about the amount of money paid to internal workforce throughout the tax year. To collect this kind of data business owners engage a formality known as W-9 Form. This helps to gather taxpayer details for the bigger annual report (1099-MISC) and avoid problems connected to tax evasion. However, newbies to freelance, especially online entrepreneurs, might be unaware of how it is important to supply an executed W-9 form to every company they work with. If you fail to do so, get prepared because you are going to start losing money.
What is tax backup withholding?
Basically, it is a sort of withholding to be taken from certain payments. When it comes to compensations given to self-employed individuals, these sorts of payment can also be subjected to retaining.
But here’s the twist: normally nonemployee wages are not supposed to go through the procedure provided that forms are supplied correctly and in time. Even if you send a 2018 W-9 when it’s 2019, it does not matter. These blanks serve to provide TINs, and they are not sent anywhere directly. For the record, currently the rate of retaining is 24% of the freelancer’s pay, so that’s a pile to be lost. Compare this to the regular self-employment tax rate of 15.3% and draw according conclusions.
Cases to consider
Businesses must proceed to backup withholding as soon as one of these situations occur:
- The contractor provided an incorrect TIN on their blank.
- The IRS notified businesses that the contractor’s TIN was incorrect.
- The employee hasn’t sent W-9 or refused to provide it.
Bottom line for freelancers: you should never attempt to avoid the procedure. Always make sure to provide all needed papers, even prior to beginning any work. Besides, they are quite easy to fill out. You can download W-9 2018 printable form anywhere on the web. And it takes around 2 minutes to complete the blank.
What do I do?
Anyway, if your employer retained some amount from your compensation, there’s nothing you can do about it. But it does not mean your income is forever going to be subjected to penalties – just ensure your TIN is provided correctly. Or next time instead of ‘my employer wants me to fill out W-9, I don’t want to deal with papers’, comply with the rules and send the blank. It will make everyone’s life easier.