A withholding agent is required to collect tax documentation upfront in order to document payees as either U.S. or non-U.S. This is a critical step to take when it comes to determining who you are paying. Unlike the Forms W-8, of which there are many based on what type of non-U.S. person you are, there is only one Form W-9. The Form W-9, Request for Taxpayer Identification Number and Certification, plays a critical role in documenting your payees as U.S. persons and obtaining a valid tax identification number (TIN), such as a social security number (SSN) or employer identification number (EIN).
How Do I Know When To Collect A Form W-9?
The Form W-9, Request for Taxpayer Identification Number and Certification, should be used when requesting the TIN of a U.S. person. A Form W-9 requester who is required to file an information return with the IRS must obtain your correct TIN to report on an information return the amount paid to you, or other amount reportable on an information return including any backup withholding.
Who Must Fill Out a Form W-9?
The Form W-9 is used to document U.S. persons, including but not limited to:
- An individual who is a U.S. citizen or U.S. resident alien;
- A partnership, corporation, company, or association created or organized in the United States or under the laws of the United States;
- Any estate (other than a foreign estate); or
- A domestic trust (as defined in Regulations section 301.7701-7).
In the event of disregarded non-U.S. entities, it is important to remember that a Form W-9 could be required in the event of a U.S. owner.
Information Requested on a Form W-9
Forms W-9 request basic identity information, including the name of the individual or business on Line 1, the federal tax classification of the payee identified on Line 1 (e.g., sole proprietor, partnership, LLC, corporation), exempt payee and FATCA reporting codes, if applicable, address information, and TIN.
Can I Use a Substitute Form W-9?
A withholding agent may develop and use their own Form W-9, or a substitute Form W-9. In order to do this, the content must be substantially similar to the official IRS Form W-9 and it must satisfy certain certification requirements. This is beneficial for some organizations who wish to incorporate a substitution Form W-9 into other business forms or information requests, however it is important that the certifications on the substitute Form W-9 clearly state that under penalties of perjury:
- The payee’s TIN is correct,
- The payee is not subject to backup withholding due to failure to report interest and dividend income,
- The payee is a U.S. person, and
- The FATCA code entered on this form (if any) indicating that the payee is exempt from FATCA reporting is correct.
When providing substitute Forms W-9, you may not:
- Use a substitute Form W-9 that requires the payee, by signing, to agree to provisions unrelated to the required certifications, or
- Imply that a payee may be subject to backup withholding unless the payee agrees to provisions on the substitute form that are unrelated to the required certifications.
If a substitute Form W-9 contains a separate signature line just for the certifications, then this satisfies the requirement that the certifications be clearly stated. However, if a single signature line is used for the required certifications and other provisions, then the certifications must be highlighted, boxed, printed in bold-face type, or presented in some manner that emphasizes and causes the language to stand out from all other information contained on the substitute form. Additionally, the following statement must be presented to stand out in the same manner as described above and must appear immediately above the single signature line:
“The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required to avoid backup withholding.”
A Roadmap to Electronic Tax Documentation
With the allowance of substitute Forms W-9, we must talk to the electronic submissions of Forms W-9.
Requesters of Forms W-9 may establish a system for payees and payees’ agents to submit Forms W-9 electronically. This can include things like fax, or cloud-based applications like Comply Exchange’s eForms application. With electronic submissions, the system must:
- Ensure the information received is the information sent, and document all occasions of user access that result in the submission;
- Make reasonably certain that the person accessing the system and submitting the form is the person identified on Form W-9;
- Provide the same information as the paper Form W-9;
- Be able to supply a hard copy of the electronic Form W-9 if the Internal Revenue Service requests it; and
- Require as the final entry in the submission an electronic signature by the payee whose name is on Form W-9 that authenticates and verifies the submission. The electronic signature must be under penalties of perjury and the perjury statement must contain the language of the paper Form W-9.
Comply Exchange’s electronic substitute Form W-9 submission process is an automated and valid means for electronically collecting Forms W-9 from your payees. With integrations, guidance and validations in place, eForms can take the burden out of manually solicitating for and validating tax documentation.
In conclusion, understanding the difference between the IRS Form W-9 and a substitute Form W-9 is important if you are considering including the request as part of other account opening or onboarding or AML/KYC processes. If you do not follow the rules for collecting substitute Forms W-9, then you run the risk of having incorrect or invalid documentation on file.
Under an IRS audit, the tax documentation on file will serve as your first layer of defense when it comes to documenting the status of your U.S. payees, and any withholding and reporting that may be required. Not collecting TINs and reporting on U.S. payees, when required, can result in information reporting and withholding penalties. For more information on penalties, refer to a recent article on how Electronic Form Collection Can Reduce Withholding & Reporting Penalties.