Taxpayer asks:
Am I legally required to have tax ID#’s on file for individuals who perform services for my organization if I know the payments will not total more than $600 in any calendar year?
Taxgirl says:
I was asked a similar question from a client years and years ago. The client ran a sort of affiliate program which rewarded third parties who endorsed the client’s product. Most of the payments were pretty small so the client didn’t want to bother with asking the third parties for their tax ID number if the client didn’t have to. It felt like a hassle.
I, of course, advised the client to get the tax ID numbers ahead of time “just in case” because it’s pretty hard to get it after the fact. That’s why, if you’ve ever done affiliate advertising on a site like Google or Amazon, they ask you for your tax ID when you get started. You see, stuff happens pretty quickly in business and especially on the internet. One day, you could be invisible, earning nothing in the way of payments. And the next? Your video of kittens in a basket goes viral (because folks apparently really, really like that stuff) and payments skyrocket. Suddenly, those measly $10/month earnings are a thing of the past.
And putting yourselves in the shoes of the payor, how easy do you think it is to get the payee to sign that tax form now? Right. They’re drunk on kitten views. You see the dilemma.
What are the real world implications when that happens? The IRS requires you to get the tax ID number if those payments total more than $600 (some exceptions apply). If you don’t – and you file the form 1099 without it – you can be subject to a penalty. Making matters worse, you’ve also caught the attention of the IRS. And nobody wants that.
So here’s my answer: if you are absolutely, 100% certain that there will be no more payments (say, it was a one time project), then trust your judgment (understanding the consequences, of course). But if there’s any chance – any at all – that those payments could add up, ask for the number in advance. It will make your life much easier. Trust me.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
