What happens if you don't collect a W-9 or W-8

Most companies that pay contractors without collecting tax forms aren't ignoring a rule. They don't know there is one, or they assume the downside is small because the vendor is the one with the tax bill.

That assumption is wrong in a specific way. The rules around W-9s and W-8s put the obligation on the payer. When a form is missing, the IRS doesn't go looking for the contractor. It looks at you.

Here is what that exposure actually consists of, domestic first, then foreign.

Domestic payees: the W-9 you didn't get

Two things make these numbers bigger than they look. First, the penalty applies separately to the copy you file with the IRS and the copy you furnish to the payee. A contractor who got no 1099 at all is two failures, so $340 for the filing and $340 for the statement: $680 per contractor before anyone starts talking about intentional disregard. Second, "never filed because we didn't have a TIN" is still never filed. The missing W-9 doesn't excuse the missing 1099.

The B-notice cycle. Say you did file, but the name and TIN on the 1099 don't match IRS records, because the vendor wrote their trade name instead of their legal name, or you typed a digit wrong, or you guessed. The IRS sends you a notice (a CP2100 or CP2100A) listing the mismatches. You're then required to send each affected payee a "B notice" asking them to correct their information, and if they don't respond within the window the notice specifies, to begin backup withholding on them. A second mismatch on the same payee escalates: at that point the payee has to get the IRS or Social Security Administration to validate the TIN directly, and you withhold until they do.

Companies that collect W-9s sloppily tend to meet this process for the first time with a stack of mismatches and no one assigned to work them. Every one you miss is a payee you should be withholding on and aren't.

Foreign payees: the W-8 you didn't get

The foreign side has higher stakes and a worse trap.

Reporting you didn't know about. Payments to foreign persons that are subject to withholding get reported on Form 1042-S, with a Form 1042 summary return. These are separate from the 1099 system entirely. A company with no W-8 process usually has no 1042-S process either, and the per-form penalty structure applies here too.

The address trap. This is the one that catches careful people. A contractor in Berlin, invoicing from a Berlin address, doing the work in Berlin. You reason: foreign person, work performed outside the US, so the income is foreign-source and there's nothing to withhold. That reasoning is correct if you can document it. Without a W-8, the presumption rules generally don't let you treat the payee as foreign on the strength of an address. For most payment types, an undocumented payee is presumed to be a US person, which puts you back in W-9 territory: 24% backup withholding and 1099 reporting on a vendor who has no US TIN to give you. For certain payment types the presumption runs the other way and treats the payee as foreign and subject to the full 30%.

Either way, the address on the invoice gets you nothing. The W-8 is what gets you the foreign-source position. It costs the vendor one page of paperwork. (If the vendor is a company rather than a person, the form is the W-8BEN-E instead; the W-8BEN vs W-8BEN-E post covers which is which.)

Who the IRS collects from

Every item above is assessed against the payer. The IRS has a withholding-agent framework precisely so it doesn't have to chase a contractor in another country, or a freelancer who moved three times since you paid them. It chases the business that made the payment, because the business is findable and has the obligation.

You can sometimes reduce the damage after the fact. A late W-9 helps with future payments and can support an abatement argument. A payee who demonstrably reported the income can help with backup-withholding liability. Every one of those paths involves a letter, a wait, and someone's attention. None is as cheap as collecting the form in the first place. If you want a rough number for your own vendor list, the exposure calculator adds up the withholding and per-form penalties from a handful of inputs.

The cheap fix

One rule, applied consistently: no form, no payment.

Before you pay a new vendor, you get a W-9 (US person) or the appropriate W-8 (foreign person or entity). You check that it's signed, that the TIN or foreign status is filled in, and that the form matches who you're actually paying. Then you store the signed form with the vendor record, so that when a question comes up in two years, the form is next to the payment history rather than in someone's old inbox.

That's the whole control. It takes a few minutes per vendor and it closes every exposure in this post. Teams do it with a checklist and a shared drive, or with a tool like steadfile that sends the request and files the result. The mechanism matters less than the rule.