Bill and Pete: A Tax Story

Bill the builder is in the process of doing his year-end tax planning. One of his independent contractors, Pete the plumber (not an incorporated business), has not yet completed the Form W-9, Request for Taxpayer Identification Number and Certification that Bill gave him. Pete has sent an invoice for $4,000 and is expecting payment next week. Bill feels that Pete is a good plumber and he would hate to upset Pete by withholding 28% of the $4,000 payment. He makes the statement that he personally knows Pete and he is a good guy who will pay his taxes.  What would be good advice to Bill?

Bill should be informed that sending out the full payment before receiving the Form W-9 would not be a smart business move for either Bill or Pete. If the form is not completed, Bill is required to withhold 28% of the payment from Pete, and Pete will not be able to get that withholding back until he files his individual income tax return.   In addition, by making the full payment to Pete and not obtaining his TIN, Bill is potentially setting himself up for an IRS penalty. The payment to Pete will require Bill to complete Form 1099-MISC at the end of the year. As payer, Bill may be subject to a penalty for an incorrect or missing TIN on a Form 1099, as well as a liability for the amount of the withholding that should have occurred.  Under Code Section 3406(h)(10), payments subject to backup withholding are treated as wages paid by an employer to an employee. IRC Sec. 3403 provides that an employer (Bill) is liable for taxes required to be withheld and deducted.

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