Any U.S. business issuing payments of U.S. source income to either U.S. payees or foreign payees is required to solicit and obtain valid certification of the payee’s TIN, name, residency and status as required in the manner set forth by IRS regulations.
Each payer is required by the IRS and many state tax regulations to solicit and certify the TIN (tax identification number or Social Security number), legal name, citizenship and corporate or individual tax status from each payee to which they issue any payment that is subject to the income test or otherwise fall into the regulatory definitions of reportable payments. This means that each payer must be able to request the proper documentation and/or be able to track the event of requesting such information or documented proof from each payee.
Solicitation and Certification Requirements
For several forms (payment types) the payer is required to send a Form W-9 (if a U.S. resident) or one of the Form W-8 series (for any payee that is domiciled in a foreign country), receive the completed documents, validate that the document is correct and retain for future access. The correct Form W-8 must be received from the foreign payee and required areas on the form must be completed with a U.S. generated TIN (a Social Security number is generated if the payee was a resident alien at one time or an ITIN would be provided by the Social Security Administration if a foreign person or entity applies for one), or in some cases the foreign tax ID. The payer must receive the completed document from the foreign payee for each payment type if applying to take advantage of any reduced tax treaty rates – if there are multiples, as treaty rates may vary for each income type.
For U.S. payees, a completed Form W-9 or substitute is required for all payment types. One completed Form W-9 for each EIN for the payee is acceptable – regardless of the number of accounts/payment types the payee has with the payer. Keep in mind that when referring to a “Payer” we are referring to one EIN – not multiple EIN’s within the same organization.
If the payment is a Form 1099-MISC type payment, the payer can request the information via contract, invoice, phone call, etc., however the method used to obtain the information from the payee must be thoroughly documented, with dates, person requesting, when, how, the method used to request and obtain the payee’s information and person providing the payee information. In all cases, the payee should be made aware that the information they are providing is covered under federal law – “penalties of perjury.”
As many companies know, at times it is difficult to obtain this documentation or the documentation received is incomplete or in error. Action is required. A company must:
- Determine if the payee is U.S. or foreign
- Apply either backup withholding or treaty/non-treaty withholding to payments
- Re-solicit as required
- Identify U.S. payees living abroad and apply certification and withholding requirements – as U.S. payees are taxed on their worldwide income
Consequences of Incorrect TINs
If vendors have provided incorrect W-9 or W-8 forms and you submit Forms 1099 or 1042-S to the IRS with invalid TINs, you can expect to hear from the IRS with a B-Notice identifying errors in the TINs or names of certain payees reported. If a correction is not made in a timely manner, penalty rates of $260 per record could be assessed.
In order to avoid harsh penalties, ensuring that you obtain the correct TINs upfront is imperative. Verifying the TIN, name and address against the IRS records when a W-9 or W-8 are completed will help to ensure the validity of the vendor and help to avoid non-compliance and penalties.
If you would like to learn how VendorInfo can help you validate W-9s and W-8s and keep you in compliance, click here to request more information or call (678) 335-5735.