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Form W-9 Tax Terms You Need to Know

With the new Form W-9 (Rev. March 2024) released, it is critical that you are collecting the most recent revision. As of now, the most recent revision is from March 2024, which you can access using the links below:

It is always a best practice to verify that your payees are providing the latest form version. With the new Form W-9 released last month, the question of a sunset period comes up. When dealing with Forms W-8, there’s usually a six-month period during which the newest revision can be used. However, for Forms W-9, there is no specific guidance or sunset period mentioned. Nonetheless, it’s crucial to adopt the new Form W-9 version promptly, within a reasonable timeframe. This is especially important for withholding agents and payors who must update their systems, internal procedures, process manuals, and any internal documents where Forms W-9 might be included, such as account opening procedures. Additionally, staff training may need updates to ensure compliance.

As we look at the new Form W-9, let’s visit so key terminology:

Disregarded Entity

A disregarded entity is an entity that is treated as if it doesn’t exist separately of its owner for federal tax purposes. It’s considered “disregarded” and its tax information is reported under its owner’s name and information.

Generally, disregarded entities shouldn’t provide tax documents using their own name. Instead, they should use the name of the regarded entity (the owner) on Line 1, which is the name shown on their income tax return. Always refer to the regarded entity to determine which withholding certificate to fill out, providing details associated with the disregarded entity including address information and tax identification numbers, where applicable.

It is important to remember that if the owner of the disregarded entity is a foreign person, they should generally complete a Form W-8, not Form W-9.

Note, Line 3a was updated on the new Form W-9 to account for and clarify how disregarded entities should complete this form. The instructions specifically note that ‘an LLC that is a disregarded entity should check the appropriate box for the tax classification of its owner. Otherwise, it should check the “LLC” box and enter its appropriate tax classification’.

Form W-9 Federal Tax Classification

Federal tax classification refers to how individuals and organizations are categorized for tax purposes based on criteria set by tax authorities. Each tax classification has its own tax rules, exemptions, and regulations that apply to them. This classification determines how taxes are withheld, including how income is reported an applicable exemptions are claimed.

Here are some common tax classifications for individuals and organizations:

  1. Individual: A person who files taxes on their own behalf.
  2. Sole Proprietor: A business owned and operated by one individual. The business income and expenses are reported on the owner’s personal tax return.
  3. Partnership: A business structure where two or more individuals or entities share ownership and are jointly responsible for the business’s profits and losses. Partnerships don’t pay income tax at the business level; instead, profits and losses are passed through to individual partners, who report them on their tax returns.
  4. C Corporation: A separate legal entity from its owners (shareholders) that is taxed as a distinct entity. Corporations file their own tax returns and are subject to corporate income tax rates.
  5. S Corporation: Similar to a regular corporation, but it chooses to be treated as a pass-through entity for tax purposes. Income and losses flow through to the shareholders and are reported on their individual tax returns.
  6. Limited Liability Company (LLC): A business structure that combines features of a corporation and a partnership or sole proprietorship. Depending on the number of members, an LLC can be taxed as a Sole Proprietorship, Partnership, S Corporation, or C Corporation.
  7. Trust/Estate: A legal arrangement where one party (the trustee) holds and manages assets for the benefit of another party (the beneficiary). Trusts and estates may have unique tax rules and rates.

Note, new Line 3b was added to the Form W-9 specifically for flow-through entities. A flow-through entity is now required to indicate on the Form W-9 if it has direct or indirect foreign partners, owners or beneficiaries when that flow-through entity is providing the Form W-9 to another flow-through entity in which it has an ownership interest in. This information is necessary for the flow-through entity to satisfy applicable reporting requirements related to its indirect foreign partners, owners or beneficiaries.

Tax Identification Numbers (TINs)

Let’s take a brief look at the four types of tax identification numbers (TINs):

  1. Social Security Number (SSN): This is the most common TIN used for tax purposes and serves as a personal identification number for U.S. individuals. It follows a three-two-four format with dashes (e.g., xxx-xx-xxxx).
  2. Individual Taxpayer ID Number (ITIN): Non-U.S. individuals who are not eligible for an SSN or an Employer ID Number receive an ITIN for tax reporting purposes. Like the SSN, it also follows a three-two-four format, but ITINs always start with the number “9”. The fourth and fifth digits can be in ranges like “50” to “65”, “70” to “88”, “90” to “92”, and “94” to “99”.
  3. Employer ID Number (EIN): This is a Federal Tax Identification Number for businesses. Despite its name, businesses don’t need employees to obtain an EIN. It follows a two-seven format with a dash (e.g., xx-xxxxxxx). EIN is the only TIN presented in this format.
  4. Adoption Taxpayer ID Number (ATIN): This TIN is for a child being adopted when the taxpayer lacks a Social Security Number for the dependent. It follows the same three-two-four format as the SSN. Note that ATINs are temporary and valid for only two years.

These TINs serve as unique identifiers for tax purposes, and it’s important to use the correct one depending on individual or business circumstances.

Form W-9 Certifications

In general, when validating a form, you should expect it to be signed and dated. That said, that is not always a requirement.

One other item to note is form certifications should not be altered or modified. However, there are two important certification instructions to consider:

  1. Backup Withholding: In certain cases, item 2 of the certification, which deals with backup withholding, should be crossed out. This indicates that the person providing the form has been notified by the IRS that they are subject to backup withholding because they didn’t report all interest and dividends on their tax return. If you encounter a form with item 2 crossed out, you should still accept the form, but make sure to apply backup withholding if applicable.
  2. Signature Requirement: The instructions for the form clarify when a Form W-9 needs to be signed. While a signature is always required for real estate transactions and both interest and dividend payments, for most other payments, a signature is not mandatory. It’s crucial to review the form instructions to understand the signature requirements, depending on the income type and recipient. Always follow your internal policies and procedures accordingly.

In all cases, you should expect to see a Taxpayer Identification Number (TIN) and a name provided on the form. To verify the accuracy of the TIN and name combination, you can use the IRS’s or third-party providers TIN matching service.

By being aware of these instructions and following the guidelines, you can ensure proper form validation for your specific line of business.

Want to learn more about this form? Read our other articles related to the Form W-9:

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This document contains general information only and is not a substitute for accounting, tax, or any other professional advice or services. The information provided is considered accurate at the time of publishing and will not be updated with new regulation requirements.

Comply Connect April 2024 – Issue 10

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