Is a W-9 a Tax Exempt Form? Explaining Its True Purpose

A Form W-9, Request for Taxpayer Identification Number and Certification, does not grant tax-exempt status from income tax. Its purpose is for a person or entity to provide their correct Taxpayer Identification Number (TIN) to a business that will be paying them. This information is required for the payer’s tax reporting process.

The Purpose of Form W-9

Businesses, financial institutions, and other entities that make certain types of payments are required to report these payments to the Internal Revenue Service (IRS). To fulfill this obligation, they use Form W-9 to request the TIN of vendors, independent contractors, and other payees. The payer needs this information to accurately prepare and file informational returns, which report the total amount paid.

A TIN is a unique number used for tax administration. For an individual or a sole proprietor, the TIN is their Social Security Number (SSN). For most other business entities, such as corporations or partnerships, the TIN is an Employer Identification Number (EIN).

The information gathered on the W-9 is most commonly used to complete Form 1099-NEC for payments of $600 or more for services provided by an independent contractor. It is also used for other 1099 series forms, such as Form 1099-MISC for rents or royalties. The W-9 itself is not sent to the IRS by the payer; instead, it is kept on file as documentation.

Understanding the Exemption on Form W-9

The confusion about the W-9’s purpose stems from the “Exempt payee code” section on the form. This exemption does not relate to income tax but refers to an exemption from backup withholding. Backup withholding is a requirement for payers to withhold a flat 24% from payments and send it to the IRS.

Backup withholding is triggered when a payee fails to provide a correct TIN to the payer. It can also be initiated if the IRS notifies the payer that the TIN provided is incorrect or that the payee has underreported interest and dividend income. The 24% withholding acts as a safeguard for the tax system.

Certain payees are automatically exempt from backup withholding and can enter a code on the W-9 to certify this status. These are typically entities, not individuals, and include:

• C or S corporations
• Government agencies
• Financial institutions
• Organizations exempt from tax under Internal Revenue Code Section 501

Most individuals, including sole proprietors, are not exempt from backup withholding and should leave this part of the form blank. An entity exempt from backup withholding is still required to report the income and pay any owed income tax.

Completing Form W-9

To complete Form W-9, you must provide your legal name as shown on your tax return, and if you have one, your business name. You will also need to check the box that corresponds to your federal tax classification, such as individual/sole proprietor, C Corporation, S Corporation, or Partnership.

Next, you must provide your full mailing address and your correct TIN. For individuals and sole proprietors, this is your SSN, while for most other business structures, it is your EIN. An incorrect TIN is a primary reason a payer would be required to implement backup withholding.

In Part I of the form, you will enter your TIN, and in Part II, you certify the information by signing and dating the form. Your signature attests that the TIN you provided is correct and that you are not subject to backup withholding. Most individuals will leave the “Exempt payee code” box empty.

If you are a corporation or other entity exempt from backup withholding, you would enter the appropriate code as detailed in the form’s instructions.