For many Vendor Maintenance teams today, the vendor setup process is still fully or partially manual, and the collection of an accurate W-9 from the vendor can be a challenge. Why? Often times the point of contact at the vendor may not be the contact that is aware of the legal structure let alone which entity name/tax id to use if there are multiple (Fortune 500 companies can have hundreds of Legal Name/Tax ID combinations). Since a W-9 is required for Vendor Setup (and ultimate payment), it becomes a checklist item that “needs to be submitted” which results in wrong information on the W-9 just to get it in.
IRS Form W-9 is used by U.S. persons (including U.S. citizens, resident aliens, and companies formed or organized in the U.S.) to certify their taxpayer identification number, their exemption from certain reporting requirements, or their back-up withholding status. So how do you know when you have an invalid W-9 that needs to be sent back to the vendor?
1. When the W-9 is the Wrong Version – The last revision of the IRS Form W-9 was October 2018. Unlike the IRS W-8 Form, when a new version is issued there is no 6 month grace period. You must collect the new W-9 version immediately. Many vendors will submit a version that has been saved or copied (sometimes to the point where it is illegible) versus completing with updated information at the time of the request.
2. When the Legal Name and Tax ID Do Not Match IRS Records – All Vendor Setup processes should include a check against the IRS TIN Matching system (either directly on the IRS site or through 3rd parties). To avoid IRS issues such as B-Notices and potential penalties and fines from filing inaccurate payee information or from having to file corrections, ensure that you have correct Legal Name and Tax ID before you pay your vendor.
3. When There is no Tax ID – If there is no Tax ID, this usually means that your company is dealing with the wrong point of contact to complete the IRS Form W-9. Send the form back and ask tactfully and professionally if there is a tax professional that can complete the form.
4. When the Vendor Provides Both an EIN and an SSN – For many Accounting Systems or ERPs, there is only one Tax ID that can be recorded on the vendor record, which also serves as a control for avoiding duplicate vendor records. When a vendor is a Single-Member LLC, for example, they can have both an EIN and an SSN and enter both on the W-9. My recommendation is to use the EIN if it matches IRS records and to request the vendor to strike out the SSN and initial or send a new W-9 with only the EIN populated. Why go through this? To prevent duplicate vendors. Both the EIN and SSN can be used to create separate vendor records and the Accounting System or ERP would not show an error, because the Tax IDs are different. Not to mention, collecting and storing SSNs includes a risk that can be avoided by collecting EINs instead. Read more about requiring EINs vs SSNs in my recent blog post.
5. When the Tax Classification is Limited Liability Company or Other and there is No Designation Entered. This designation determines whether the vendor is reportable. Those that enter a C = C Corporation or S = S Corporation as exempt from 1099 reporting. Those that enter a P = Partnership are reportable and would receive a 1099. For Other, the vendor can be a 501(c) entity where you need to verify their non-profit status.
6. When There is No Signature – Require a signature as validation of the certifications under penalties of perjury. A valid W-9 is one that has accurate information and is signed, and then kept on file as proof as due diligence at the time of vendor setup. Digital signatures are acceptable as long as they are date stamped and contain other electronically validating information such as a pin.
What did I miss?
Resource to Help! W9 Manager
Ever thought of automating your W-9 collection process? W-9 Manager enables the vendor to generate a valid and complete W-9 and works with you to manage and track your vendors’ W-9, as well as manage W-9 forms centrally and help you determine 1099 responsibility. Use Discount Code HAPPY19 to save 10% . Click here to learn more and save.
IRS: Instructions for the Requestor of the W-9 Form: https://www.irs.gov/pub/irs-pdf/iw9.pdf
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Protect the Vendor Master File from Fraud. Keep it Clean.
Debra R Richardson
MBA, APM, APPM, CPRS
Debra is an accounts payable speaker, consultant, and trainer with over 20 years of experience in AP, AR, general ledger, and financial reporting for Fortune 500 companies including Verizon, General Motors and Aramark.
For the past eight years, Debra has focused on Global Vendor Maintenance, and implemented a vendor self-registration portal for 140k+ global vendors across five Accounting Systems/ERPs. In her consultancy, she focuses on internal controls and authentication to prevent fraud in the vendor master file.