U.S. organizations that issue payments of U.S. source income to U.S. or foreign payees are required to solicit and obtain valid certification of the payee’s TIN, name, residency and status, as per IRS regulations.
According to Linda Foertschbeck, CEO of IRS Compliance and payment reporting expert, “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 falls into the regulatory definitions of reportable payments.”
This means that each payer must request the proper documentation. They must also document the solicitation from each payee since not every payee will respond. If a vendor does not provide a TIN, you must backup withhold 24 percent of payment and remit it (forms 941 and 945) to the IRS. Documentation of your TIN solicitation efforts can mitigate penalties for compliance failure.
Solicitation and Certification Requirements
For several reportable payment types, the payer must send an IRS Form W-9 if the payee is a U.S. resident or one of the Form W-8 series if the payee is foreign, including nonresident aliens. (For reportable payment types, see IRS Instructions for Forms 1099-MISC and 1099-NEC – Miscellaneous Income and Nonemployee Compensation.) Note that U.S. persons living abroad should complete the W-9, as all their income is subject to U.S. taxation.
When you receive the completed documents, you must validate that the document is correct and retain it in your vendor records. You must receive the correct W-8 form from a foreign payee. The required areas on the form must be completed and should include either a U.S.-generated TIN or, in some cases, the foreign tax ID. (A U.S.-TIN could be a Social Security number if the payee were a resident alien at one time, or an ITIN provided by the Social Security Administration if the foreign person or entity applied for one.) If the foreign vendor wants to claim reduced tax treaty withholding rates for different payment types, you must receive the completed document from the foreign payee for each payment type. Treaty rates may vary for each income type.
For U.S. payees, one completed Form W-9 (or substitute) suffices, regardless of the number of accounts or payment types the payee has with the payer. A “Payer,” Foertschbeck points out, refers to one EIN – not multiple EIN’s within the same organization.
For reportable payments, according to Foertschbeck, you can request the vendor’s information via contract, invoice, phone call, etc. However, you should thoroughly document the method you use to obtain the information from the payee with dates, the person requesting, when, how, and the person providing the payee information. In all cases, says Foertschbeck, “the payee should be made aware that the information they are providing is covered under federal law – ‘penalties of perjury.'”
As many companies know, it is sometimes difficult to obtain the documentation, or the received documentation is incomplete or in error. Action is required. Foertschbeck says 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
Some vendors provide incorrect information on their W-9 or W-8 forms. If you submit Forms 1099 or 1042-S to the IRS with invalid TINs, expect to receive a CP2100 or CP2100A from the IRS identifying errors in the TINs or names of certain payees reported. If a correction is not made promptly, penalty rates of more than $260 per record could be assessed.
To avoid penalties, you must obtain the correct TINs upfront. You or your third party service provider can verify the TINs through the IRS TIN Match program.