Phew! Done with Payroll Reporting for Another Year!

3/17/2022 - By Constance O'Donnell

If you are a business owner, you probably feel a huge sense of relief after the whirlwind of January, providing employees and the state and federal governments with the payroll tax returns, Form 1095’s for health insurance and preparing all the Form 1099 Misc’s and 1099 NEC’s! Next January, however, will be easier if you will take one easy step.

Vendors

Each vendor should complete a Form W-9 before receiving any payments. The vendors you are targeting are not corporations, but instead small independent contractors, sole proprietors, LLC’s and partnerships. These small businesses provide a variety of services such as consulting, home health care, cleaning, yard maintenance and repair to name just a few.

The vendor is usually happy to provide the information when it is tied to being paid. As an extra incentive, the vendors who do not provide you with their name, address and EIN on the Form W-9 are subject to backup withholding – which for the 2022 year is 24%.

IRC Section 3405

IRC Section 3405(a) addresses the backup withholding requirements by stating a taxpayer must withhold at the 4th individual tax rate (currently 24%) in any of four events. The first event listed (Section 3405(a)(1)(A)) states “the payee fails to furnish his TIN to the payer in the manner required.”

Backup Withholding

What do you do with the backup withholding? Well, the amount will be deposited with the IRS as a Form 945 EFTPS deposit. At the end of the year, this will be reported on a Form 945. Be sure to keep track of your payments – the dates and amounts - for the annual reporting.

For example, Vendor A does a job for you and refuses to complete the Form W-9. The total amount due to the vendor is $2,000, but you are required to do a backup withholding of 24%. In this case, the vendors check will be $1,520.00. The balance of $480 will be deposited with the IRS as a Form 945 EFTPS deposit. This will be reported to the vendor on his Form 1099 NEC as backup withholding.

The simple answer is to have all your vendors complete a W-9. Even if you have done business with this vendor for years, their address, EIN or tax status may have changed. At year-end, you will have the information to prepare a Form 1099 as required.

Questions?

If you have any questions regarding backup withholding, filing Forms 1099 Misc or 1099 NEC, or any other questions, please reach out to our knowledgeable staff.

About the Author | Connie O'Donnell

Connie is a supervisor in the Tax & Accounting Services practice of Saltmarsh, Cleaveland & Gund. Prior to joining Saltmarsh in December 2014, Connie worked with a local CPA and consulting firm performing a variety of tax and accounting functions for business and personal clients, including preparation of corporate, non-profit and individual tax returns. She began her career in public accounting in 1993 and specializes in helping small businesses and individuals navigate tax returns.