Collecting TIN – Metallurgical Madness or Backup Withholding?

Tin is a chemical element with the symbol Sn and an atomic number 50.  Tin is an important component of bronze and pewter.  Bronze is primarily copper, but pewter is about 85-90% tin. For tax professionals a TIN is a Taxpayer Identification Number.  A TIN is an important element that allows the IRS to track certain types of payments.   Most of us are familiar with our own TIN – our social security number (SSN).  Our SSN is used to track our wages, income tax withholding and social security payments.  For the self-employed a TIN is used to track payments received as independent contractors.  Businesses, on the other side of the coin, use a TIN to track payments made to independent contractors for reporting on a Form 1099-MISC.

When a business hires an independent contractor to whom a Form 1099-MISC will be issued, the business requests a TIN from the independent contractor.  If no TIN is provided the business is required to start backup withholding on any reportable payment.  Reportable payments include interest, dividends, rents, royalties and nonemployee pay.  Backup withholding is an amount deducted from the reportable payment and remitted to the Internal Revenue Service.  The current backup withholding rate is 28%.

Before any reportable payments are made, a business should request a TIN from the payee.  The request is made on a Form W-9 – Request for Taxpayer Identification Number and Certification.  Frequently businesses wait until it is time to complete their annual Form 1099 filing to request a TIN.  The problem created by waiting until tax-reporting time is that the business may not be able to get a TIN from the individual who was paid.  Failure to obtain a TIN from a payee may subject the business to having to pay the amounts they were required to withhold.  Ouch!

Prior to making any reportable payments it is important for the business to require the payee to complete a Form W-9.  If the payee does not furnish a TIN the business is required to begin backup withholding immediately.  Some taxpayers have reasoned that they will simply not claim deductions for amounts paid to independent contractors who did not furnish a TIN.  Unfortunately, not claiming a deduction for amounts paid does not relieve the payer from their obligations to collect and remit backup withholding.  This is one of those “heads they win, tail I lose” scenarios.

If you operate a business that is required to file Form 1099-MISC don’t be remiss about collecting TINs.  The process is simple – just request the person you are about to pay to complete a Form W-9.  Here is a link to Form W-9 on the IRS website.  If the individual you are paying does not provide a TIN, inform them that you are required to begin backup withholding at 28%.  If that does not compel them to provide a TIN, follow through and begin backup withholding.  Any amounts withheld are reported to the IRS each year on Form 945.  If you have questions about backup withholding ask one of the tax professionals at Seid & Company, CPAs for more information.