Vendor onboarding best practice includes getting a vendor’s tax identification number and classification on a W-9 or equivalent W-9 upfront with other vendor information. But what do you do if the vendor fails to give you that information? You’re going to need it.
Ask Again
Here are steps to take. The first is to ask the vendor again. Be sure to send a copy of the W-9–it’s part of your responsibility, even though the vendor can easily download the form from https://www.irs.gov/pub/irs-pdf/fw9.pdf. Document your solicitations so you can prove your attempts to the IRS. Let the vendor know in your W-9 solicitation that you will have to withhold 24 percent (currently) and remit to the IRS unless the vendor provides a valid tax identification number. Refer them here: https://www.irs.gov/taxtopics/tc307. That should motivate them to comply.
A few bad-faith vendors out there might avoid responding, or they may reply with inaccurate information. Whether you use it directly or have a third party do it for you, the IRS TIN Match program will determine whether the vendor’s TIN is valid. Using TIN Match, you can uncover incorrect TINs before 1099 filing rather than when the IRS sends you a CP2100. Note that you can also find an EIN (employer identification number) from public records of business registrations in most states. However, that will not work for the social security numbers of sole proprietors.
Withhold
If the vendor will not comply, but you have not paid them yet, backup-withhold 24 percent from the payment. According to gross-up rules, if you pay the vendor the total amount due without withholding, you may be liable for an additional 24 percent owed to the IRS. You do not want to be paying your vendor’s taxes. Withhold 24 percent and remit that to the IRS on the annual Form 945.
Report
At 1099 time, complete the 1099 and leave the tax ID slot blank or enter 000000000. The IRS will send you a CP2100 and possibly a proposed penalty notice 972CG. But if you have taken the above steps, you are protected. Per the CP2100, you will have to issue a B-notice to the vendor and begin or continue backup withholding. But documentation of your efforts to obtain a valid TIN will allow you to avoid a penalty. If you have backup withheld and remitted, you won’t face a penalty.
For more information, see IRS Publication 1281. Backup withholding is an additional administrative burden for your company. It’s not something you want to have to do. But it’s the law, and it beats paying penalties.
Find Another Vendor
There is one more thing you can do if a vendor will not provide a W-9. Find another vendor. There are other vendors out there who would love to have your business who will do business legally.
Make It Possible
It can be tough to follow these steps if your procure-to-pay (P2P) process is not optimized and consistent across your organization and has no vendor onboarding process. Organizations that have re-engineered and rationalized their P2P process gain efficiency and better overall performance. This includes having clear policies for vendor onboarding, which takes place up front after vendor selection rather than after purchase and invoicing.
If the first time your accounts payable department learns of a new vendor is upon receiving an invoice, they are already behind. Nevertheless, the first step should be to ask for a W-9. Requiring a W-9 before payment is the best leverage AP has with the vendor. If payment “must” be made, still pursue the steps outlined above. But then consider, as an organization, whether the vendor in question is worth it.
For help automating vendor onboarding, including getting W-9s and automatic TIN validations, contact us.