Form W-9, officially known as the “Request for Taxpayer Identification Number (TIN) and Certification,” is an IRS form used by businesses and individuals in the United States to collect information from independent contractors, freelancers, and other non-employees they hire. While you might encounter this form as a self-employed individual or a business requesting services, understanding its purpose is crucial for tax compliance.
Essentially, Form W-9 is how a payer (the entity hiring or paying you) gathers your essential tax information to accurately report payments made to you to the IRS. This form is not filed with the IRS by you, but rather kept by the payer for their records. It’s a vital part of the U.S. tax system, ensuring that income is properly reported and taxed.
What’s New in Form W-9 Instructions?
The IRS regularly updates instructions for tax forms to reflect changes in tax law and clarify existing guidelines. Recent updates to the Form W-9 instructions include several key points, particularly concerning Limited Liability Companies (LLCs), partnerships, and withholding regulations. Here’s a breakdown of the key changes:
Line 3a Clarification for LLCs
One significant clarification involves how Limited Liability Companies (LLCs) should complete line 3a of Form W-9, which pertains to business entity classification. The updated instructions emphasize the distinction between disregarded and non-disregarded LLCs.
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Disregarded Entities: For an LLC that is treated as a disregarded entity for tax purposes (meaning its income is reported under the owner’s tax identification number), the form should reflect the owner’s tax classification. The instructions now explicitly state that on line 1, the owner’s name should be entered, and on line 2, the disregarded entity’s name can be provided. On line 3a, the appropriate tax classification box for the owner (individual, corporation, etc.) should be checked.
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Non-Disregarded Entities: For LLCs not treated as disregarded entities, line 3a has a single box to check, with space to specify the LLC’s tax classification: Corporation (C), S corporation (S), or Partnership (P).
This clarification aims to reduce confusion and ensure accurate tax reporting for LLCs, regardless of their tax classification status.
Line 3b for Partnerships
A new line 3b has been added to Form W-9 specifically for partnerships (including LLCs classified as partnerships), trusts, or estates. This line requires these entities to indicate if they have foreign partners, owners, or beneficiaries when providing the form to a flow-through entity in which they hold an interest.
This addition is designed to provide crucial information to flow-through entities about their indirect foreign partners, owners, or beneficiaries. This information helps these entities comply with applicable reporting requirements, particularly concerning Schedules K-2 and K-3 (Form 1065), which deal with international tax matters.
If you are a flow-through entity receiving a Form W-9, you are only required to verify that line 3b is correctly checked when you are otherwise obligated to obtain a new Form W-9 from your partner, owner, or beneficiary. Unless you know the information on line 3b is incorrect, you can rely on it. However, if line 3b is completed (or if it’s not completed and you know it should be), you might have reporting obligations on Schedules K-2 and K-3 (Form 1065).
Withholding under Sections 1446(a) and (f) Starting in 2023
Significant changes related to withholding and reporting under sections 1446(a) and (f) have been implemented, particularly concerning transfers of partnership interests.
Section 1446(f) introduces rules for withholding on the transfer of partnership interests. While generally applicable to transfers on or after January 1, 2018, certain withholding provisions under this section took effect after 2022. These include:
- Transfers of interests in publicly traded partnerships (PTPs).
- Distributions made by PTPs.
- Partnership withholding under section 1446(f)(4) on distributions to transferees of non-PTP interests that failed to withhold correctly under section 1446(f).
Regulations regarding withholding and reporting on distributions by PTPs under section 1446(a) have also been expanded to allow more entities to act as nominees for PTP distributions. For detailed applicability dates, refer to IRS Notice 2021-51.
Updated Qualified Intermediary (QI) Agreement
The Qualified Intermediary (QI) agreement, crucial for foreign entities acting as intermediaries in U.S. tax matters, was updated effective January 1, 2023. The new guidance, outlined in Rev. Proc. 2022-43, replaces the expired Rev. Proc. 2017-15. This updated agreement allows certain individuals to simplify their obligations as withholding agents under Chapters 3 and 4 of the tax code, as well as payors under Chapter 61 and section 3406. Refer to Rev. Proc. 2022-43 for comprehensive details.
Key Reminders for Form W-9
Beyond the recent updates, several important reminders are associated with Form W-9 and related withholding rules:
Backup Withholding Rate
The current backup withholding rate is 24% for reportable payments. Backup withholding is triggered under specific circumstances, such as failing to provide a Taxpayer Identification Number (TIN) or IRS notification of an incorrect TIN.
FATCA and Backup Withholding Exemptions
The Foreign Account Tax Compliance Act (FATCA) aims to prevent tax evasion by U.S. persons through offshore accounts. Form W-9 plays a role in FATCA compliance. It includes sections for entering Exempt payee codes and Exemption from FATCA Reporting Codes, if applicable. These codes, detailed in the Form W-9 instructions and the “Payees and Account Holders Exempt From FATCA Reporting” section, allow certain payees to claim exemptions from FATCA reporting and backup withholding. Part II of Form W-9 also includes certifications related to FATCA reporting.
Differences in Chapter 3 and Chapter 4
It’s important to understand the distinction between withholding under Chapter 3 and Chapter 4 of the Internal Revenue Code.
- Chapter 3 deals with withholding on certain U.S. source income paid to non-U.S. persons.
- Chapter 4 (FATCA) focuses on withholding on payments to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) that do not report their U.S. account holders.
While Form W-9 is primarily used for domestic payees, understanding these chapters is crucial, especially for businesses dealing with international transactions. For in-depth details on backup withholding and related topics not covered here, consulting IRS Publication 515, “Withholding of Tax on Nonresident Aliens and Foreign Entities,” is recommended.
Purpose of Form W-9
The core purpose of Form W-9 is to prevent backup withholding. Chapter 3 of the tax code stipulates that non-U.S. persons are taxed on income effectively connected to a U.S. trade or business. A correctly filled and signed Form W-9 allows payers to avoid backup withholding on payments to payees.
However, payers are required to withhold and deposit 24% of reportable payments to a payee if any of the following occur:
- The payee fails to provide a Taxpayer Identification Number (TIN).
- The IRS notifies the payer that the payee’s TIN is incorrect.
- The payee has been notified of underreporting interest or dividends.
- The payee fails to certify that they are not subject to backup withholding.
Backup withholding continues until the issue causing it is resolved.
Backup Withholding Liability
It’s critical for payers to understand that failing to collect backup withholding when required can make them liable for the uncollected amount. Therefore, proper use of Form W-9 and adherence to backup withholding rules are essential for tax compliance.
Chapter 4 and Form W-9
For Chapter 4 purposes (FATCA), Form W-9 is utilized to determine withholding obligations on payments to FFIs and NFFEs that don’t report their U.S. account holders. If an account holder fails to provide their TIN in this context, the withholding rate is 30%.
TIN Matching e-services
To help payers ensure the accuracy of payee information, the IRS offers TIN Matching e-services. These online services allow authorized payers to validate name and TIN combinations electronically, reducing errors and potential backup withholding situations. This service enhances accuracy in information reporting and minimizes compliance issues.
Background on Relevant Chapters
To fully grasp the context of Form W-9, understanding the background of Chapter 3 and Chapter 4 regulations is helpful.
Chapter 3: Section 1446(f)
Section 1446(f) addresses the taxation of gains from the disposition of partnership interests by non-U.S. transferors. Generally, if a portion of the gain is treated as effectively connected income (ECI) under section 864(c)(8), the transferee (buyer) must withhold 10% of the amount realized, unless an exception applies.
The amount of gain or loss treated as ECI is equivalent to the transferring partner’s share of ECI if the partnership sold all its assets on the transfer date. This is considered a proportionate sale of the partnership’s U.S. trade or business assets by the partner. Specific rules apply if the partnership also holds U.S. real property interests, as detailed in Regulations section 1.864(c)(8)-1(c).
If a Form W-9 is not provided, a presumption of foreign status is generally required. However, a payee can challenge this presumption by providing reliable documentation. An affidavit from the transferor, under penalty of perjury, stating their U.S. TIN and non-foreign status, can exempt them from withholding, unless the transferee has actual knowledge of its falsity.
If the transferee fails to withhold when required, the partnership becomes responsible for withholding the tax (plus interest) from distributions to the transferee.
Chapter 4: FATCA
Chapter 4 stems from the Foreign Account Tax Compliance Act (FATCA) of 2010. FATCA’s primary goal is to obtain information about account holders of Foreign Financial Institutions (FFIs) and substantial U.S. owners (more than 10% ownership) of certain foreign entities.
U.S. persons are taxed on their worldwide income, and while owning offshore accounts is not inherently illegal, U.S. taxpayers must comply with income tax and information reporting obligations related to these offshore activities. FATCA aims to improve compliance in this area.
Withholding agents are obligated to withhold 30% of withholdable payments to FFIs or NFFEs that fail to provide documentation allowing exemption or certification of no substantial U.S. owners. Intergovernmental agreements (IGAs) based on Model 1 or 2 require reporting FFIs to identify U.S. accounts and report information about U.S. account holders.
When payments are made through intermediaries, the withholding agent must determine the Chapter 4 status of each intermediary in the payment chain to identify the actual payee. Regulations section 1.1471-3(e)(4) outlines standards for determining if a claim of exemption is unreliable or incorrect. Detailed information on presumptions, valid documentation, and consequences for non-withholding can be found in Regulations section 1.1471-3. For information on exempt payees, refer to the “Payees and Account Holders Exempt From FATCA Reporting” section in IRS publications.
