If you own and operate a business and choose to run it as a sole proprietorship rather than creating a separate taxpaying entity for it, such as a corporation, the IRS will consider you to be self-employed. As a result, you will report all income you earn as a sole proprietor on your personal tax return – regardless of whether or not you were required to furnish your clients with W-9 forms.
Purpose of Form W-9
As a sole proprietor, it’s likely that you’ll be asked to fill out a W-9 form by one of your clients or customers. The W-9 form allows a person or business who makes a payment to you, reportable on an information return, to obtain your taxpayer identification number, or TIN. For example, if you operate a service business and earn $600 or more from a single client – the IRS requires that client to report the annual payments made to you on a 1099-MISC. Prior to filing the 1099, however, your client will request a completed W-9 from you.
Filling Out W-9s
The form itself is extremely short and requires only that you provide your legal name, business name of your sole proprietorship, if different, address and taxpayer identification number – which is usually your Social Security number. You can, however, use an Employer Identification Number obtained from the IRS for your sole proprietorship business instead of a Social Security number. Using an EIN results in the same obligations and liabilities to the IRS as using a Social Security number.
Because the main purpose of the W-9 is to match your income to your TIN, the IRS allows your customers and clients who request the W-9 to verify the information you’ve entered on the form. Under the TIN Matching program, W-9 requesters can easily verify whether the name and TIN you’ve provided matches up with IRS records. In addition, the IRS has authority to impose monetary and criminal penalties against sole proprietors who fail to provide a TIN or intentionally furnish an incorrect one.
Implications to Sole Proprietors
The W-9 form and resulting information return ultimately allows the IRS to track your self-employment income and ensure it gets reported on your tax return. Unlike an employee who has all of his income reported to the IRS on a W-2 form, the money you earn as a sole proprietor isn’t as easily tracked by the IRS. Since you owe income and self-employment tax on your net profit, you’ll need to report your self-employment income and expenses on a Schedule C (or Schedule C-EZ). Additionally, you must prepare a Schedule SE after the Schedule C to determine the amount of self-employment tax you owe.