W-9s and backup withholding: what to collect from vendors, and what happens if you don’t

01What a W-9 tells you#

The current revision is dated March 2024. It collects what you need to decide whether a payee gets a 1099 and to fill one in:

A W-9 is only for US persons, including resident aliens. A foreign contractor gives you a Form W-8BEN (an individual) or W-8BEN-E (an entity) instead, and you don’t issue them a 1099 for work performed outside the US.

• Line 1, the name that goes with the TIN. For a sole proprietor that’s the person, not the trade name.
• Line 2, a business or disregarded entity name, if different.
• Line 3a, the federal tax classification: individual or sole proprietor, C corporation, S corporation, partnership, trust or estate, or an LLC with its tax classification. This box decides whether a 1099 is needed at all.
• Line 3b, new in the March 2024 revision, flags a flow-through entity with foreign partners, owners or beneficiaries.
• Exemption codes, for payees exempt from backup withholding or from FATCA reporting.
• The TIN: an SSN for an individual or single-member LLC owner, otherwise an EIN.
• The signature and date certifying all of it.

02When to request one#

Request a W-9 from every US vendor that might receive a reportable payment, before the first payment. In practice that means every contractor, every law firm, every landlord, and anyone else you pay for services who isn’t obviously a large corporation paid by card. Collecting from more vendors than strictly need one costs nothing; missing one costs you a January chase or a backup-withholding liability.

It is the classification line that saves you work: a vendor that checks “C corporation” or “S corporation” is generally exempt from 1099-NEC reporting (law firms excepted). With a W-9 on file, that decision is documented. Without one, you’re guessing from the name, and “Studio Ltd” or “Design LLC” tells you nothing about how the entity is taxed.

03Backup withholding: the 24% rule#

Backup withholding is set by the Internal Revenue Code and run by the IRS. A payer generally must withhold 24% of a reportable payment if the payee doesn’t furnish a TIN, furnishes one that is obviously incorrect (wrong number of digits, letters in it), or if the IRS notifies you that the payee is subject to it. The rate is tied to the fourth-lowest individual income tax rate, which is 24% for 2026.

In practice: if a contractor invoices $5,000 and has not given you a W-9, you pay them $3,800 and owe $1,200 to the IRS. The withheld amount is deposited with your other federal tax deposits, reported on Form 945 (the annual return of withheld federal income tax, due January 31, or the next business day), and shown on the payee’s 1099 even if the payment was under the normal reporting threshold. If you were required to withhold and didn’t, the IRS can assess the 24% against you.

Most startups never actually backup-withhold. They make a W-9 a condition of payment, which is cleaner. But the rule is the reason that condition is reasonable, and saying so tends to produce the form.

04TIN matching and B notices#

The IRS’s TIN Matching program, part of its e-Services, lets a payer check a name and TIN pair against IRS records before filing 1099s. It is free and, for a company paying a handful of contractors, the interactive version takes minutes. A mismatch usually means a sole proprietor gave their business name with their SSN, or an LLC gave its owner’s name with the LLC’s EIN. Fix it with the vendor before January.

If you file a 1099 with a missing or mismatched TIN, the IRS may send a CP2100 (to payers with 50 or more such returns) or CP2100A (fewer than 50) listing the problem accounts. For each mismatch you compare the notice with your records, and if they agree, you send the payee a first “B” notice with a blank W-9 and begin backup withholding if they don’t respond in time. If the same payee appears again within three years, a second B notice requires them to prove the number with an SSA card or an IRS letter. IRS Publication 1281 sets the exact steps and response windows; it is the document to follow when a notice arrives.

05Storing W-9s#

A W-9 holds an SSN or EIN, so treat it as sensitive data. Keep it attached to the vendor record in your accounts payable tool or accounting system rather than in a shared inbox, limit access to the people who file 1099s, and note the date received and whether the TIN was matched. When a vendor changes its entity type (a freelancer forms an S corporation, say) the old W-9 is wrong for payments after the change; ask for a new one.

Electronic W-9s are allowed if your system meets the IRS’s requirements for electronic submission, including an electronic signature and the same certification language. Most AP and vendor-onboarding tools that collect them do.

06A vendor onboarding checklist#

The rule is set once and the work is done at the point of entry, so January becomes a report rather than a project:

• Legal name and payment details, confirmed by the vendor, not copied from an invoice.
• Form W-9 (US) or W-8BEN / W-8BEN-E (foreign), signed and dated.
• TIN checked through IRS TIN Matching for anyone likely to get a 1099.
• Classification recorded on the vendor (corporation, LLC, individual) and the vendor flagged as 1099-eligible or not in QuickBooks Online or Xero.
• Payment method recorded, so card payments, which the processor reports on Form 1099-K, are excluded from the 1099 total.
• Change of bank details verified by phone to a known number, never by replying to the email asking for it.