When the employer is notified via W9 as described above, it withholds 25%. Does it withhold 25% only upon notification via W9 or does it do this regularly and it must it inform the independent contractor of the amount of the withholding?
Based upon you what you have written, I believe that the IRS has sent notification to the person or company that pays compensation to you ("payor") that your TIN on tax reporting forms (i.e., Form W-2 or Form 1099) sent to the IRS is invalid, and thus, it is required to withhold 30% of amounts paid to you. That requirement, called “back-up withholding,” applies to taxpayers who cannot establish either their correct TIN and/or that they are a U.S. citizen or other U.S. person (generally, a non-resident alien, i.e., "green" card holder). A "foreign person" who earns income in the U.S. is generally subject to back-up withholding at the rate of 30%. I suspect that the IRS has sent the Form W-9, Request for Taxpayer Identification Number and Certification, to your payor in order to obtain certification of your correct TIN. You should promptly fill out, sign, and date the Form W-9 and give it to your payor. The Form W-9 asks you to certify that: (1) the TIN listed on the form is your correct TIN; (2) you are not subject to back-up withholding; and (3) you are not a U.S. citizen or other U.S. person. Form W-9 generally is not sent to the IRS, as it is obtained and kept by the payor to determine the residency status of the taxpayer and whether the taxpayer-payee is subject to the back-up withholding requirements. In this case, however, it appears that the IRS may have requested your payor to have you complete the Form W-9 and return it to the Service. Once you have provided the fully completed and executed Form W-9 to your payor, then you should request your payor to cease withholding 30% from the payments being made to you.
There also appears to be some doubt as to whether you are properly classified as an employee or an independent contractor. If you're an employee, then your employer must withhold income and employee social security and Medicare taxes from your wages or salary, based on the number of withholding allowances that you have claimed on Form W-4. If you are an independent contractor, then the payor cannot withhold any amounts from your pay unless you are a “foreign person.” You are then responsible for making quarterly estimated income tax payments and paying any remaining unpaid taxes, including self-employment tax at the end of the year, based upon the compensation that you have received.
If doubt exists as to your employment status, I suggest that you hire a tax attorney experienced in handling employee-independent contractor issues to determine your correct status. Whether you are an employee or an independent contractor depends on a multi-factor common law standard, which primarily focuses on the degree of control and direction that the payor exercises over the time and manner in which work is performed, the investment (if any) that the worker is required to make in the venture, the nature of the relationship between the parties, and whether the worker has an opportunity to earn a profit or loss from the venture. Regardless of whether you would otherwise be regarded as a common law employee, the Internal Revenue Code specifies that certain categories of workers are deemed to be either statutory employees (i.e., corporate officers, an agent-driver or commission-driver engaged in distributing certain products, a full-time life insurance salesperson, a home worker performing work to specifications of the payor with materials or goods furnished by him, and certain full-time traveling or city salespersons) or statutory non-employees (i.e., licensed real estate agents, certain direct sellers of consumer products for sale or resale in the home or at a non-permanent retail establishment, and newspaper or shopping news distributors or delivery people). To learn more about the distinction between an employee and an independent contractor, you may wish to look at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-(Self-Employed)-or-Employee%.
The answer to this question does not establish an attorney-client relationship. Moreover, this attorney is licensed to practiced law ONLY in the State of California. Answers to questions from users in other jurisdictions or states are meant to provide only general information. Users should contact a local attorney in their jurisdiction or state to address their specific tax issue.
Forms W-9 are not filed with the IRS. They are maintained by the principal who uses the information contained on the Form W-9 to prepare Forms 1099 - the report you receive at the beginning of the year that indicates how much your principal paid you as a contractor. The Forms 1099 are filed with the IRS, which uses the information to verify how much self-employment income you (the contractor) is reporting on your tax return.
The IRS regularly checks the taxpayer identification numbers (TIN) on Forms 1099 to verify that such numbers are legitimate. TINs can be either social security numbers or employer identification numbers. If the IRS finds that there is a problem with a TIN, then it informs the principal that it should contact the contractor to verify the TIN. If the contractor fails to confirm the TIN within a certain period of time, then the principal is required to start withholding income taxes from the contractor's payments. Please consult a tax advisor on whose advice you can rely.
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Employment / Labor Attorney
Additionally, contact an employment attorney immediately to see if you were classified properly as an independent contractor. Most employment attorneys offer a free consultation, so don't be afraid to ask for one.
Any post of discussion above is general in nature and is not intended to and should not be construed as legal advice. Furthermore, the above posting does not create or establish any attorney-client relationship. Contact an attorney as soon as possible to discuss your legal options. [John D. Wu is licensed to practice law before all California federal and state courts]
The employer withholds from your tax return based on the amount of exemptions you claim. But that has nothing to do with the W-9, which is just a request for a taxpayer ID number. Employers generally do not have to withhold on compensation paid to independent contractors. So your issue is whether you are an independent contractor or an employee.