A lot of small businesses hire independent contractors to do projects that don't require a regular full or part time employee. Part of that process can be have that person fill out a W-9 form so that you have the proper information to give them a 1099-NEC form the next January showing how much you paid them.
That said, do you have to have every person you hire fill out a W-9? The simple answer is no. The complex answer is maybe. If you are hiring another business to do a single task for you, then probably not providing they give you invoices for the work. However, if you are sub-contracting work out to another person or business, then you probably should.
The reason to have them fill out the W-9 is more than just to have the information to give them a 1099-NEC for each years payments to them. The W-9 also is verification that you are not responsible for withholding taxes or paying payroll taxes for that person. A third reason is that when you claim a large contract labor expense on your tax return, you have the proof of who you paid it too so the deduction can't be questioned.
What it comes down to is that the use of the W-9 fills two basic business functions: the information you need to meet paperwork requirements and protecting your business from IRS audits.
The IRS has recently released a new version of Form W-9, Request for Taxpayer Identification Number and Certification and instructions. This is the first revision of the form since 2018. Since LLCs are not recognized at the federal level, the new version clarifies what type of LLC is filling out the form:
- Clarifies that the requestee should check the “individual/sole proprietor” box on line 3a for an LLC that is a disregarded entity (Schedule C Sole Proprietor).
- Adds guidance regarding lines 1 and 2 for LLCs that are disregarded entities. In that case, the owner’s name is reported on line 1 and the disregarded entity’s name is reported on line 2.
- Clarifies that the LLC checkbox on line 3a is only for LLCs that are not disregarded entities. The requestee should provide the appropriate classification code (C=corporation, S=S corporation, or P=partnership. Single or Multiple member LLCs can request (Form 2553) to be taxed at the federal level as one of these.)
- Adds new line 3b to indicate foreign ownership in a passthrough entity. Requestees should check the box if:
- On line 3a they checked partnership, trust/estate, or LLC with code “P,”
- The requestee is providing the form to a flow-through partnership, trust, or estate in which they have ownership interest, and
- They have any foreign partners, owners, or beneficiaries.
See the revised instructions for updated information on transfers of partnership interests and qualified intermediary agreements.