A large number of transactions occur every day for which the person or entity paying for a service or good has to request a W-9, such as freelance work or investment income. It is the payer's responsibility to obtain your personal information, such as a taxpayer identification number, to report all payments to the Internal Revenue Service on a 1099 form. One way to avoid having federal taxes withheld from your payments is to qualify as an “exempt payee” on Form W-9.
Who Can Be an Exempt Payee
On a W-9 form, an exempt payee refers to certain entities, such as corporations, tax-exempt organizations and trusts, and all U.S. and foreign government agencies, for example, that are automatically exempt from backup withholding. If you're not an exempt payee, you can still be exempt from the withholding provided your W-9 is complete and correct, the IRS has never notified you that you're subject to backup withholding, or if it has, the agency later sent you a notice advising that you're no longer subject to the withholding.
Nonexempt Payees and Backup Withholding
For all other payees who can't satisfy any of the criteria for exemption from backup withholding, the law requires the payer to withhold 28 percent of all payments for federal taxes. The tax withheld is reported on a 1099 form prepared by the payer and which you will receive a copy of to prepare your taxes. Even if you aren't an exempt payee, you can still get a refund if too much tax is withheld.