TIN Matching: A Key Component of the Vendor Management Process for Businesses

As a business owner or manager, you are responsible for several processes to keep operations running smoothly. Some are daily processes, while others are quarterly or annually. IRS business tax filing falls into these categories. While many IRS tax forms are only due on an annual basis, there are many steps to tracking this process and maintaining accurate records for when the time comes.

An often overlooked component of the IRS tax filing process is vendor management. Many businesses are tracking their employers closely as part of their payroll process, but what about the vendors and independent contractors that your business interacts with on a limited basis?

In this article, we will review what the vendor management process looks like, why it is important for IRS tax compliance, and how to streamline this process.

What is Vendor Management?

Vendor management is fairly self-explanatory, this is the process of tracking the vendors and independent contractors that your business makes payments during the given tax year.

In addition to tracking the non-payroll payments made to vendors and independent contractors, businesses should also collect and store certain tax information from each of these businesses and/or individuals. This includes their legal name, legal address, and most importantly their Taxpayer Identification Number (TIN), either their EIN or SSN.

What is the difference between an EIN and SSN?

There is one major difference between these numbers. If you are dealing with another business, they will have an IRS-assigned Employer Identification Number (EIN).

If you are dealing with an individual, the TIN will be their Social Security Number (SSN). Regardless of whether you are collecting an EIN or SSN from a vendor, the most important part of this process is ensuring that the number is correct, and matches what the IRS has on record for this individual or business.

Why is Vendor Management an Important Process?

Businesses that make certain transactions with other businesses or hire independent contractors in a given tax year are required to file 1099 Form Series at the end of the year with the IRS.

Two of the most common 1099 forms are the 1099-MISC for miscellaneous payments, and the 1099-NEC for non-employee compensation, although the entire series is devoted to reporting different types of payment transactions to the IRS.

Without a valid TIN number from the vendor, filing 1099 series forms cannot be filed successfully with the IRS.

How Should I Collect Vendor Information for My Business?

Now, we are getting into the complexities of the process. The IRS-recommended option for collecting vendor information is by using Form W-9. This is an IRS tax form that is not designed to be filed with the agency, instead, it is designed for businesses to keep for their records.

What is the process for Requesting Form W-9?

This process is comparable to the process of requesting a Form W-4 from a new employee during the onboarding process. However, if you are onboarding a new employee, you can likely track them down at the office or reach them easily if they fail to complete and sign the form.

When it comes to requesting Form W-9 from a vendor or independent contractor, it can be a bit tricky to collect their information, as they are less involved with your business. While it may take longer to collect the information, you will need the vendor to provide their TIN, legal name, address, and backup withholding requirements. You also want the vendor to sign their form certifying that they have provided accurate information.

Is there an Easier Option for Requesting Form W-9?

Many businesses become frustrated with the slow process of collecting W-9 information from their vendors. Mailing paper forms or faxing them back and forth can be a tedious process that wastes administrative time.

There is an easier option out there. Businesses can find an online W-9 manager or a tool for collecting Form W-9 electronically from their vendors. Choosing a solution for your online vendor management can also include additional solutions like e-filing tax forms and furnishing form copies to vendors. Another major benefit to an online W-9 solution is that you will have the opportunity to store the information securely online

What Happens if a Vendor Provides an Incorrect TIN on Form W-9?

If your vendor fails to provide a correct TIN, you can indicate on their tax forms that you don’t have this information. However, this is not a permanent solution. The IRS requires businesses to make up to three attempts to collect the TIN on Form W-9.

If the vendor still fails to provide a correct TIN, you are required by the IRS to initiate backup withholding. Businesses may also receive an IRS notice directing them to begin backup withholding because their vendor provided an incorrect TIN.

In backup withholding the business (payer) is required to withhold a portion of the payment from the vendor (payee) and send this to the IRS. This practice will continue until the vendor provides an accurate TIN.

How Can I Ensure that Vendors Provide an Accurate TIN?

Only the IRS can verify a TIN, however, if you choose a W-9 solution that has a TIN Matching feature, this can really take the accuracy of this process to the next level.

When TIN Matching is performed, this means that the IRS checks it using its database and sends back a status indicating that the number either matched their records or it was a mismatch.

When a business is able to receive a status on whether or not the TIN matches IRS records allows them the ability to reach back out to the vendor to request an accurate TIN. Once the vendor sends you the correct TIN, you can easily update the information and store it until tax season when it’s time to file 1099s.

This eliminates the “back and forth” from the process. It also lessens the chance of an IRS form rejection or the added responsibility of initiating backup withholding.

Key Takeaways from this Article

• Maintaining accurate vendor records is crucial when it comes time to file 1099 Series Forms with the IRS.
• Form W-9 was created by the IRS to help businesses (payers) request important tax information from vendors (payees), most importantly the vendor’s Taxpayer Identification Number (TIN).
• Choosing an online W-9 solution will streamline the process and eliminate wasted administrative time.
• When a vendor fails to respond to W-9 or provides an incorrect TIN this can cause a headache for business owners and can ultimately require them to initiate backup withholding.
• TIN Matching is a key component of the W-9 process, finding a solution that includes this feature will eliminate the stress of repeatedly requesting an accurate TIN from your vendors, and ultimately help you avoid submitting incorrect TINs to the IRS on your 1099 forms.