“A person who is required to file an information return with the IRS must obtain your correct taxpayer identification number (TIN) to report, for example, income paid to you, payments made to you in settlement or payment card and third party network transactions, real estate transactions, mortgage interest you paid, acquisition or abandonment or secured property, cancellation of debt, or contributions you made to an IRA.” (http://www.irs.gov/pub/irs-pdf/fw9.pdf)
So what does that mean?! Essentially the W-9 is used to collect your Social Security Number (SSN) or Employer Identification Number (EIN) so that your client can provide you with a 1098 or 1099.
Most of the W-9 is self-explanatory; enter your name, business name, address and SSN/EIN where appropriate. Where it gets a little tricky is the tax classification section. Many of our clients are Single-member LLCs which isn’t an option under the Limited Liability company category. So what should you do? In this specific situation, the activity of the LLC is reported on the tax return of the individual therefore the owner of a single-member LLC should check off the Individual/sole proprietor box, enter their name on the “Name” line and their business name (if applicable) on the Business name line.
With regards to entering your SSN vs. your EIN (if you have one), similar to the entity classification you should enter the identification number for wherever the income is to be reported.
Example: John Smith is the only member of the technology consulting firm Smith Consulting, LLC and his business activity gets reported on his return each year via Schedule C. John has 2 employees therefore also has an EIN. One of John’s clients is the local hardware store, ABC Hardware, Inc. Come January ABC Hardware is going to request that John Smith fill out a W-9 so that they can issue him a 1099-MISC for the amount that they paid him to maintain their computer equipment. John is going to enter his name – John Smith – on the “Name” line, Smith Consulting, LLC on the “Business name” line, check the box for “Individual/Sole Proprietor” and continue completing the W-9 with the business address. He would also complete the SSN section rather than the EIN boxes.
Example 2: Same facts as above except that John Smith, in addition to being a computer guy, happens to be pretty good at fixing things. He spends a couple of hours each month at his church and earns just over $1,000 for the year. He doesn’t have a handyman business nor does he have any expenses. The church requests a W-9 to be completed so that they too can issue him a 1099-MISC. John will now fill out the W-9 with just his name, still check the box for Individual/Sole Proprietor, list his home address, and complete the boxes for his SSN. In this situation, the activity will be reported on Line 21, Other Income on his Form 1040, U.S. Individual Income Tax Return.
If you are the employer, a best practice would be collect a vendor’s completed W-9 before issuing their first payment of the year. This alleviates any hassle that could occur at the end of the year when it’s time to prepare and issue the 1099s. As a matter of fact, according to the instructions you are to withhold 28% if the vendor does not furnish their TIN.