Backup Withholding and the Form W-9

Use of this form can eliminate the need for backup withholding.

V & V Construction Company v. United States, 2001-1 USTC ¶50,403(N.D. Ill. 2001)

Background. If a self employed worker performs services for your church (and earns at least $600 for the year), but fails to provide you with his or her social security number, then the church is required by law to withhold 30.5% of the amount of compensation as “backup withholding” (30% after December 31, 2001). Backup withholding is reported on Form 941 (quarterly employer’s tax return). Churches that fail to implement backup withholding may be subject to a penalty, as a recent case illustrates.

A construction company hired several subcontractors over the course of the year. When subcontractors were hired for a project, the company would send them a letter requesting them to fill out an enclosed Form W-9. A Form W-9 is used to obtain another person’s social security number so that a Form 1099 can be issued to the person at the end of the year. In fact, the company failed to obtain the social security numbers of several workers, and issued 1099 forms without entering a social security number. The company failed to engage in backup withholding on these workers. The IRS ruled that the company was liable for a penalty and interest on the amounts of backup withholding that it failed to deduct from the workers’ compensation. The company claimed that the workers in fact provided their social security numbers to the company after the IRS initiated its audit, and it voluntarily provided this information to the IRS. Therefore, the company argued that no penalties or interest were owed.

The court’s ruling. The Tax Court ruled that the company had to pay the penalties and interest on amounts it failed to withhold. The court observed that an employer is required to engage in backup withholding for any payment “if the payee fails to furnish his taxpayer identification number … either orally or in writing.” Further, “payments that are subject to the backup withholding are treated as if they were wages paid by the employer to an employee” and so the employer is required to file quarterly Forms 941 and pay withheld taxes. Backup withholding is required

for the period of time any reportable payment is made by the payor and the time in which the taxpayer identification number has not been furnished. Therefore, backup withholding should occur at the time of payment to the employee; and if an employer does not have an employee’s taxpayer identification number at the time of payment, backup withholding is required.

The court concluded that several subcontractors had not furnished their taxpayer identification numbers at the time the company made payments to them, and therefore the company was required to engage in backup withholding.

The tax code specifies that “if a payor fails to deduct and withhold the taxes, but the payor can show that the payee reported the payment on his or her federal income tax, the monies will not be collected from the employer.” However, the payor is not relieved from liability for any penalties or additions to the tax otherwise applicable for such failure to deduct and withhold. As a result, the court ruled that the company was liable for penalties and interest for failing to engage in backup withholding even though the workers correctly reported their taxes.

Relevance to church treasurers. Church treasurers should consider the following procedures:

1. Each year, obtain a supply of W-9 forms from the IRS.

2. Provide a W-9 form to each compensated worker who is not an employee of the church who is paid $600 or more during the year. Workers report their name, address, and social security number on this form.

3. Do not pay a worker until the W-9 is returned, containing all the required information.

4. If a worker does not provide you with his or her social security number, request this information. If the worker refuses to provide it, then point out that the church will be required to engage in backup withholding (30.5% after August 6, 2001, and 30% after December 31, 2001). If the worker still does not provide a social security number, then the church must backup withhold the applicable percentage of the worker’s compensation. The withheld amount is reported on the church’s quarterly Form 941.

5. You are not required to engage in backup withholding for corporations. So, if an incorporated business performs services for your church, you are not required to engage in backup withholding and you are not required to issue a 1099.

6. A person providing false information to avoid backup withholding is subject to a $500 civil penalty. A criminal fine of up to $1,000 and imprisonment for up to one year, or both, are also possible.

This content originally appeared in Church Treasurer Alert, October 2001.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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