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Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

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3–29. Withhold First Payment until W-9 Form Is Received

Within one month after the calendar year is complete, the accounts payable department must issue completed 1099 forms to a variety of business entities, detailing how much money the company paid them during the year. The IRS uses its copy of this information to ensure that the revenue reported by the recipients is correct. The trouble for the issuing company is that many potential recipients do not want to report income to the government, and so will refuse to fill out a W-9 form or to supply a taxpayer identification number to the company. Thus, completing 1099 forms by the IRS-mandated due date can be a substantial problem.

A simple way to avoid this issue is to withhold payment of a company’s first payment to a supplier until it completes and submits a W-9 form to the company. By doing so, the accounts payable staff avoids the year-end hassle of determining who receives a 1099 form. This step does add work to the check-processing function, but eliminates so much more work when the 1099 forms are issued that the extra labor is worth it. This best practice can put the accounts payable staff under some pressure from the materials management department if that group is trying to obtain rapid delivery of crucial parts from a new supplier who wants payment in advance. In most other instances, there will be little in-house opposition to this system.

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