W-9 form and U.S. tax system

Recently, I run into a new thing, W-9 form. As a Ph.D student, I only need to file a W-4 form. However, following my first guess, I have to say that W-9 form is a very confused form in the U.S. tax system as long as a non-citizen person is involved, this is why I wanna talk about it. Hopefully I can get it clear while I have to doubt about my capability of doing that, because even Albert Einstein said: "The hardest thing in the world to understand is the income tax". So what can I do with it, well, at least I can try, at least this is 21th century.

So, what does W-9 form mean? An IRS form, also known as "Request for Taxpayer Identification Number and Certification", which is used by an individual defined as a "U.S. person" (see notes below) or a resident alien to verify his or her taxpayer identification number (TIN). An entity that is required to file an information return with the IRS must obtain your correct TIN to report, for example, income paid to you, real estate transactions, mortgage interest you paid, etc. For example, companies that issue dividends use the W-9 form to verify a shareholder's TIN. An client or company will use the information collected on the W-9, or substitute W-9, to produce a Form 1099 which details the earnings that the independent contractor received from that client that tax year. The Form 1099 is sent to both the independent contractor and the IRS; some states may also require a separate mailing of the 1099 as well.

In brief, if you are requested by a company or institution (for example, a research institute like NBER) to file a W-9 form, which basically means you receive payment from them no matter what is the reason of this payment. And when this payment is issued to you, they do not withhold tax in an usual way (usually your main employer withholds tax on your paycheck for IRS via payroll system regularly, e.g. monthly or biweekly). Put another way, these payments have not gone through tax deduction, and you have to report these income to IRS when you do your tax return. I can think of two possible reasons for a company or institution doing this. First, the payment they issue to you does not follow a consistent and continuous fashion, then it is hard to management it via a payroll system. Second, the amount of these kinds of payment has a very large variation, but generally is very small amount, like 5-50 dollars; so it is not efficient to invest human resources to manage tax on these payments. Of course, there also could be some regulatory reason for this, and I am not patient enough to figure it out.

Now, we can see the difference between W-9 and W-4. Unlike the Form W-4, which employees use to authorize an automatic tax withholding from their paychecks (via a payroll system, and done by their employers), the W-9 does not withhold taxes or social security payments. Individuals or entities are solely liable for the full amount of taxes assessed to earned income. In some cases (for example, small business like individual contractors or designers), you are typically required to submit quarterly estimated tax payments to the IRS and possibly your state tax board as well. But in most of cases, you can report it yearly when you do the tax return I guess.

So, why we are doing business in such an inefficient way? why the companies and institutions who pay us just do not simply report the payment to IRS? Fortunately or unfortunately, we have lots of law, and one of them has something to do with this: Even though employees are legally required to provide certain personal information to their employers, an employee's privacy is protected by law. An employer that discloses an employee's personal information in any unauthorized way may be subjected to civil and criminal prosecution.

So far we know some basics about W-9 form, then for a student like me what should be known about it and how to proceed with it? An usual question, and I have a simple semi-official answer for you. According to payroll service of University of Southern California:


Form W-9 is a tax document which declares you to be a "resident alien for tax purposes." Filing a W-9 has two immediate consequences: 
1. It negates all tax treaty protections and provisions.
2. It gives you more options in what you want to claim on your W-4 (any marital status, number of allowances, or "exempt").


Generally, you should file a W-9 only after you have been in the U.S. for at least the periods of time noted for the following visa types, and then only if you feel it is appropriate:


F-1, J-1 Student     After 5 years in the U.S.
J-1 Scholar         After 2 years in the U.S.
H-1                         After 183 days in the U.S.
The University cannot give advice on whether or not you should file a W-9; however be aware that you are responsible for all potential consequences if you decide to claim residence in the U.S.

I am still interested in getting another semi-official answer from my employer, Penn State University. We will see how it goes. Back to the beginning, anyway, please notice that this is just a tip of the iceberg. How complicated the U.S. tax system can be? I am not sure there is anyone who can answer this question. But I can give you some rough numbers. In a 2004 press release the IRS stated they have around 116,675 full time employees. The IRS has a budget of $11.1 billion to hire additional workers be its part time or full time employees. According to an IRS report titled "Workforce of Tomorrow Task Force: Final Report August, 2009" the IRS has 88,203 full-time employees. This number is derived from a chart on page 7 of the report that shows the age breakdown of full-time IRS employees. Adding the numbers up comes to the 88,203 figure. At the end of the report one of the summary pages mentions the IRS 100,000 employee workforce. Obviously this number is an estimate off all full and part-time employees.

So roughly 100,000 people work for IRS every business day every year, how can you live in United States without paying taxes? That is something almost surely impossible! Do you know how many people work for Google? 23,331 (2010, worldwide, not U.S. only). Do you know how many people working for Microsoft? 89,000 (2010, worldwide, not U.S. only). It seems IRS is the biggest money-seeking organization in U.S.

I have also realized that recently, lots of people have proposed to reform U.S. tax system. Let's know about it a little bit, so we can watch our pocket. How about starting with this one:

Taxing Ourselves, 4th Edition: A Citizen's Guide to the Debate over Taxes, Joel Slemrod & Jon Bakija.

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Notes: U.S. Person


A "U.S. person" is a citizen of United States, a lawful permanent resident alien of the US, (a "Green Card" holder), a refugee or someone here as a protected political asylee or under amnesty. US persons also include organizations and entities, such as universities, incorporated in the US. The general rule is that only US persons are eligible to receive controlled items, software or information without first obtaining an export license from the appropriate agency unless a license exception or exclusion is available.

A "foreign person" is anyone who is not a US person. A foreign person also means any foreign corporation, business association, partnership or any other entity or group that is not incorporated to do business in the US. Foreign persons may include international organizations, foreign governments and any agency or subdivision of foreign governments such as consulates.



Reference:
1. http://www.wisegeek.com/what-is-a-form-w-9.htm
2. http://www.investopedia.com/terms/w/w9form.asp
3. http://ais-ss.usc.edu/empldoc/faq/faq4.html#7
4. http://en.wikipedia.org/wiki/Microsoft
5. http://en.wikipedia.org/wiki/Google
6. http://rph.stanford.edu/10-2.html