The IRS changed the format of Form W-9 in December 2011. Since the update, I have received many questions on how to fill out the form for disregarded entities.
What is a Form W-9 and what is it used for?
A Form W-9 is an IRS document used to collect relevant tax information from another party. The form is commonly used by companies or individuals that are required to issue an informational return (ex: 1099) to another party for money the company paid to that party.
For instance, if Company A hired Company B (an LLC) and was required to issue Company B a 1099, Company A would send a blank W-9 to Company B to fill out and return. Company A would then use the information from that W-9 to prepare the 1099.
What is a disregarded entity?
A disregarded entity is any business that is considered separate from its owner for legal purposes but not for taxation. Disregarded entities come in many shapes and sizes, but a common one is the single-member Limited Liability Company (LLC).
The default tax classification for an LLC with only one member is the disregarded entity. If a single-member LLC does not affirmatively elect to be taxed as a corporation, it will be taxed as though the business is a sole proprietorship.
As a disregarded LLC, how do I fill out a W-9?
Essentially, you should fill in your personal name in the Name block, your company’s name in the Business name block, your company’s address in the address block and your social security number in the Taxpayer Identification Number section.
To make this a lot easier, here is a handy guide:
*right-click to download
If you employ workers from an economically disadvantaged group, your business may be entitled to a Work Opportunity Tax Credit (WOTC). The credit equals 40% of the first $6,000 of wages paid to a qualified worker during the year.
But, you might also claim a special “summertime credit” for hiring youths age 16 or 17 who work for your business between May 1st and September 15th. The youth must reside in an Empowerment Zone (EZ) or Renewal Community (RC). The WOTC for these workers is 40% of the first $3,000 of wages. You can use the EZ/RC address locator located on the HUD website to find out if a worker qualified for this credit.
Small business owners, if you find a postcard in the mail from the IRS, have no fear; it is likely not an audit notice.
The IRS is alerting about 4 million small business owners of the availability of a new tax credit this year. If you are an “eligible small employer” and pay more than 50% of the cost of health coverage for staff, you may qualify for a tax credit of up to 35% of what you pay. If you don’t pay for health coverage for your staff but have been thinking about doing so, this credit may be something to discuss with your financial advisor.
If your business pays some or all of the health insurance premiums for staff, it may be eligible for a new federal tax credit created by the Patient Protection and Affordable Care Act, signed into law on March 23, 2010. The IRS has guidance on this credit in question-and-answer and scenario forms on its web site to illustrate how the credit works.
Sole proprietors, did you know that changing your business entity type may minimize the risk of an IRS audit? You can, for example, incorporate and use S corporation status. The audit rates on S corporations, even if they are one-owner entities, are dramatically lower than the rates on sole proprietorships.
During the government’s fiscal year 2008 (ending September 30), sole proprietors with gross receipts of between $100,000 and $200,000 had audit rates of 3.9%. The audit rate on all S corporations was only 0.4%.
There are many substantive business reasons to convert a sole proprietorship to another business entity type. Minimizing your risk of audit is just a collateral benefit.