W-9: Why do we need them?

I am always reminding clients about the importance of a tax form called W-9. If you go to any CPA they will inform you that the IRS mandates any funds paid to a vendor over $600 must be reported on a 1099 form. The W-9, legally, gives us the apporpriate information to complete these 1099 forms.

The 1099 takes place of a W-2 wage statement for a company or individual. This is how we report money paid to this entity. Without this, the IRS would have a hard time determining how much a person made the previous year.

"So what if I choose not to report? What is the big deal? I am helping out a friend by not reporting." Uh oh. I say to the last statement since it typically is not a good rule of thumb to get into business with family or friends. :) Another uh oh for the idea that you think you will not get "caught". The IRS has ways to find out the truth.

Example: Many of my clients, as you may know, are real estate investors that eagerly write off many expenses-including subcontractor labor. If you are ever audited, the IRS will quickly see that you wrote many checks, totaling more than $600, to your contractor last year. Not good for you. You, yes you, could be held liable for the contractors unpaid taxes. YIKES!! At the very least suffer penalties.

Note: You do not have to report income on corporate entities, LLCs, GPs, or LLPs.

So I always say, do the right thing and report.

Go here to learn about how the IRS views employees vs. independent contractors:
http://www.irs.gov/businesses/small/article/0,,id=99921,00.html