Startups often find themselves rushing at year-end over vendor tax compliance; not because they don’t want to do it right, but because missing or late W-9s, B-Notices, backup withholding, and looming penalties turn what should be a routine closing task into a full-blown crisis.

As deadlines approach, teams rush to track down vendors, verify TINs, correct mismatches, and avoid fines from the IRS. These waste time, burn cash, and distract founders, finance leads, AP, Ops, and HR from the main business priorities.

Collecting W-9s after payments start, failing to validate vendor info, and missing the small details can trigger B-Notices (CP2100/CP2100A), backup withholding at a 24% rate, or even civil penalties under IRC §6721/6722.

This article shows how proactive W-9 collection and automation can solve these issues. It will help you know how to streamline your vendor tax workflow and avoid last-minute compliance challenges.

An overview of W-9s and 1099s

What is Form W-9?

Form W-9 (Request for Taxpayer Identification Number and Certification) is the IRS form a business uses to obtain critical tax information from vendors, contractors, or other payees who are U.S. persons.

The required vendor information on a W-9 includes:

• Legal name (individual or business)
• Business name or “doing business as” name if different
• Entity type or classification (sole proprietor, LLC, corporation, etc.)
• Address
• Taxpayer Identification Number (TIN): Social Security Number (SSN), EIN, or, in some cases, Individual Taxpayer Identification Number (ITIN)
• Signature and date, certifying under penalties of perjury that the information is correct and whether the payee is subject to backup withholding

The data on W-9 is used to properly complete information returns (most notably 1099s). If the W-9 is missing, incomplete, or incorrect, it can trigger backup withholding or IRS mismatches.

What is Form 1099-NEC (and Form 1099-MISC)?

These are IRS information returns filed by a business at year-end to report certain payments made to non-employees or for other non-wage income.

1099-NEC (Nonemployee Compensation) is used to report payments of $600 or more to a person who is not an employee (contractors, freelancers, vendors) for services performed during the year.

1099-MISC is used for other types of payments, such as rent, royalties, awards, medical and healthcare payments, or certain legal payments not classified under nonemployee compensation. Also, gross proceeds to attorneys in some cases are reported here.

After the 2020 changes, nonemployee compensation moved out of 1099-MISC into 1099-NEC. Generally, 1099-NEC must be filed with the IRS and furnished to the payee by January 31 following the tax year.

Best Practices for Collecting W-9s at Onboarding

When you’re building a startup that is growing fast, the difference between a smooth year-end and rushing in January will be determined by how you handle compliance at the start. Below are the best practices for W-9 onboarding:

Make W-9 Collection Mandatory in Vendor Onboarding

From the get-go, include W-9 collection as a non-negotiable step in your vendor onboarding workflow, before any payments are issued. Many startups mistakenly issue the first payment and then chase down tax forms, which opens risk for backup withholding, penalties, and B-Notices.

Make it part of your vendor registration or contracting process: no signed contract, no vendor profile created, no payment until W-9 is submitted and valid.

Use Secure Digital Collection Tools

Physical paper and email attachments with SSNs/EINs are risky and inefficient. Modern best practice is to use secure, digital platforms for W-9 collection:

• Use encrypted vendor portals or electronic signature tools that are IRS-accepted.
• Ensure forms submitted are completed properly (filled all required fields, signed, dated).
• Design your user interface to guide vendors through fields clearly.

Not only does this protect sensitive data, but it also shortens turnaround time.

Verify TIN/EIN Automatically

Collecting a W-9 form is one thing; making sure the TIN or EIN matches the vendor’s legal name is equally important. IRS mismatches trigger CP2100 notices (“B-Notices”), meaning you’ll have to correct forms or risk penalties.

Best practices here include:

• Using the IRS TIN Matching service (if you’re eligible) or API integrations offered by vendor management tools.
• Running verification as soon as the W-9 is submitted (real-time) so vendors can correct mistakes immediately.

Keep W-9s Centralized

Nothing derails compliance more than scattered forms: forms sitting in someone’s inbox, saved on shared drives, or lost in email threads. Store all W-9s in a secure, centralized document repository or vendor management system (VMS) with role-based access.

Tag or index them by vendor name, TIN/EIN, date of collection, and whether any verification is pending. Also, maintain version control; if vendor information changes (legal name, business structure, TIN, address), require an updated W-9.

This way, during audit or 1099, you can pull up proof easily, avoid backup withholding, and confidently meet IRS deadlines.

How to Automate 1099 Prep

As your startup scales, manual 1099 prep (collecting vendor forms, reconciling payments, chasing missing information) becomes a liability. Automation changes that mess into a smooth, reliable process.

Modern automated workflows combine integrated AP platforms with secure vendor portals. These systems allow vendors to upload their W-9 (and W-8 if needed) during onboarding via a secure link.

The vendor portal becomes the single source of truth: billing address, TIN/EIN, legal name, payment method, etc. This reduces back-and-forth emails and late submissions.

Real-Time Sync with Vendor Payments and Data Validation

The platform should map W-9 data automatically to vendor records in the AP/ERP system.

When the system knows vendor X has a valid TIN and W-9 on file, every time you make a payment, it can flag whether it’s reportable (e.g., nonemployee compensation at least $600) for a 1099.

More advanced tools also perform real-time TIN/EIN validation or “TIN matching” to catch mismatches early, which helps avoid B-Notices or backup withholding.

Auto-Generate Draft 1099s and E-file Directly with the IRS

Rather than waiting until year-end, automation lets you generate draft 1099s early: show vendors their statements for review, catch mistakes, and correct data.

Come filing season, the system can e-file directly with the IRS and states, adhering to the reduced thresholds. Thanks to changes in IRS rules (e.g., under TD 9972, if you have 10 or more information returns, electronic filing is required as of 2024/2025).

How Startups Can Prevent B-Notices and Backup Withholding

For Seed- to Series B startups managing multiple vendors, it’s important to understand B-Notices and backup withholding to avoid disruptions.

A “B-Notice” is a formal IRS notification, usually in the form of CP2100 or CP2100A, sent to you (the payer) when one or more Form 1099s you filed have incorrect, missing, or mismatched name and TIN combinations.

If the vendor’s name and TIN on their W-9 don’t match IRS records, the IRS demands corrective action. Without that, you’ll be forced into backup withholding.

IRS Rules on Backup Withholding and Why They Matter

Backup withholding is a required withholding of 24% of any future payments to a vendor when certain conditions apply. For example:

• Vendor fails to provide a correct TIN, or
• IRS issues a CP2100/CP2100A notice because name/TIN mismatches occur, or
• Vendor fails to certify they are not subject to backup withholding under prior under-reporting of interest/dividends.

If you get a B-Notice, the law requires you to send a “B” Notice to your vendor within 15 business days, requesting a corrected W-9. If they don’t respond, you must begin backup withholding on reportable payments within 30 days.

Failing to comply can lead to IRS penalties, and damaged vendor relations and cash-flow issues if you suddenly withhold 24% of invoices.

How Automation and W-9 Collection Up Front Prevents These Issues

By embedding W-9 collection into vendor onboarding, you ensure every vendor provides their correct legal name, EIN/TIN, and entity type before making a payment.

Use tools that validate TINs in real time (IRS TIN-Matching) to catch mismatches early. Automation also allows you to flag missing or incorrect information proactively.

When a CP2100 notice arrives, having a centralized, up-to-date vendor database means you can immediately issue the required “B” Notices, secure corrected W-9s, and avoid having to retroactively scramble. This reduces risk, saves time, and helps maintain compliance.

Step-by-Step Workflow: W-9 to 1099 Compliance for Startups

A clear, enforced workflow can help you achieve a smooth year-end compliance. Here’s a workflow that you can embed into your AP/vendor management systems:

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Vendor Signs Contract

Include in the contract (or vendor agreement) a clause stating that a completed W-9 must be returned before any payment is made.

As soon as the contract is signed, the vendor onboarding tool or AP platform should automatically send a secure W-9 request. This ensures no vendor slips through without proper tax data. 

Secure Collection and Validation

Use secure digital portals or vendor management tools (not unsecured email). Vendors should submit W-9s electronically, with e-signatures, and the system should perform checks: is the form filled out fully? Is the TIN/EIN valid? Are there missing signatures or mismatched names?

Auto-Sync to Vendor Record in AP/ERP System

Once a validated W-9 is collected, the vendor’s record in your accounts payable or ERP system should be updated automatically with the legal name, TIN/EIN, entity type, address, etc.

This avoids manual data entry errors, ensures consistency, and makes pulling together payee information easier when building 1099 reports. Tools that offer W-9/W-8 APIs can integrate this into the workflows.

Track Payments

Throughout the year, track all payments made to vendors who require 1099s. The system should have logic to flag vendors once payments approach the $600 threshold (for 1099-NEC, services, etc.), or other thresholds depending on form type. Use dashboards or alerts.

Also track vendor type: whether they’re corporations (often excluded), if payments came via third-party networks, etc. QuickBooks, for example, helps categorize and automatically exclude non-reportable payments in its 1099 prep flow.

Year-End Auto-Generation and E-Filing

When the tax year ends, use your system to automatically generate draft 1099 forms from the synced vendor data and payment history. Review for accuracy (TIN mismatches, name inconsistencies, excluded payments).

Then, e-file the returns via IRS systems like IRIS or FIRE, ensuring you have your Transmitter Control Code (TCC) ready. The IRS’s IRIS Taxpayer Portal allows businesses to file 1099 information returns for free online, upload files, download payee copies, and correct mistakes.

Tips for Choosing the Right Platform or Partner

Here are the features to pay attention to when looking for the right platform or partner that can help you automate 1099 Prep and stay IRS-compliant:

Secure W-9 Collection

Collecting W-9s securely means encrypted transmission, secure storage, and tamper-proof access control. The system should allow vendors to fill out W-9s online via portals rather than via email. Look for audit trails: when was the form submitted, reviewed, changed, etc.

TIN/EIN Validation

To avoid mismatches (which trigger B-Notices or backup withholding), your platform should have real-time or near-real-time TIN/EIN (name and tax ID) validation. For example:

• The IRS TIN Matching program lets authorized payers verify the name/TIN combination before submitting information returns.
• Tools like Tax1099 provide a TIN Lookup / Validation API and bulk matching for vendor master data clean-up.
• Some newer platforms integrate the IRS TIN API directly (for instance, TAINA).

1099 Automation and E-Filing

Automation must cover the full year-end workflow: tagging vendors as 1099-eligible, mapping payments to correct categories, generating 1099s, and e-filing both federal and state returns.

The ideal platform auto-generates drafts, provides previews, catches errors early, and files on your behalf. Avalara’s APIs are a good example; they let you embed W-9 and 1099 workflows into your existing accounting or ERP with secure validation and e-filing.

Scalability from Seed to Series B

Your vendor base, number of entities, payment volume, and compliance requirements will grow. The solution should support:

• Multiple entities/subsidiaries
• Bulk vendor imports and data updates
• Role-based permissions and audit logging
• Handling many vendor types (contractors, freelancers, agencies, etc.)

Gravity Software, for example, supports multi-entity 1099 processing and seamless vendor tracking for multiple companies in one system.

Streamline W-9 Collection and Automate 1099 Prep from Day One

Fast-growing startups can achieve stress-free tax compliance by building compliance into onboarding, not scrambling in January. The most effective approach is to make W-9 collection a mandatory step in vendor setup, validate TINs automatically, and keep all forms centralized in one secure system.

This ensures every contractor is IRS-ready before the first payment goes out, eliminating the risk of B-Notices and 24% backup withholding.

Automation then takes compliance a step further. Instead of struggling with spreadsheets and manual reminders, Chore integrates directly with your vendor onboarding and AP workflows.

That means W-9 data is validated in real time, mapped automatically to vendor records, and synced with payments throughout the year.

By year-end, draft 1099s are ready for review, correction, and instant e-filing. This saves you hours of admin work, reduces IRS penalty exposure, and builds stronger vendor relationships by paying accurately and on time.

Ready to eliminate last-minute 1099 chaos? Schedule a free consultation to explore how Chore can help your startup collect W-9s up front and automate compliance from onboarding to e-filing.

FAQs

Why should startups collect W-9s during vendor onboarding?

Startups should collect W-9s during vendor onboarding because it ensures they have the vendor’s correct taxpayer identification (TIN/EIN or SSN) before making the first payment. Doing this upfront prevents year-end delays, eliminates the stress of chasing vendors for missing forms, and helps avoid IRS compliance issues such as B-Notices (when vendor info doesn’t match IRS records) and backup withholding (24% tax that must be withheld if no valid W-9 is on file).

Who needs to fill out a W-9 form?

Any U.S.-based vendor, freelancer, or independent contractor your startup pays $600 or more during a calendar year should complete a Form W-9. This includes individuals, sole proprietors, partnerships, and certain LLCs. The W-9 provides their TIN, which you’ll need to prepare and file Form 1099-NEC or 1099-MISC at year-end.

What is a B-Notice, and how can startups avoid it?

A B-Notice is an IRS alert that a vendor’s Taxpayer Identification Number (TIN/EIN) on their W-9 doesn’t match IRS records. If unresolved, your startup may have to apply 24% backup withholding and face penalties for inaccurate 1099s.

To avoid it;

• Collect W-9s upfront
• Use IRS-approved TIN matching tools
• Securely store vendor info, and
• Fix mismatches immediately

What happens if a vendor refuses to provide a W-9?

If a vendor refuses to provide a W-9, your startup is required by the IRS to treat them as a non-compliant payee. This means the following:

• You must withhold 24% of all payments made to that vendor and remit the withheld funds to the IRS.
• You’ll still need to issue a 1099 form (if payment thresholds are met) using whatever information you have on the vendor, even if incomplete.
• Refusal often implies risk. Some vendors may be trying to avoid tax reporting, which can expose your business to IRS scrutiny.

How does automation help with W-9 and 1099 compliance?

Here’s how automation helps startups streamline W-9 and 1099 compliance:

• W-9 Collection at Onboarding: Automation platforms can request and collect W-9s digitally as part of the vendor onboarding workflow.
• Real-Time TIN/EIN Verification: Automated systems validate the vendor’s taxpayer information instantly against IRS records, reducing the risk of B-Notices and mismatches.
• Centralized, Secure Storage: Instead of scattered PDFs in email or Google Drive, W-9s are stored securely in one system, making them easy to access during audits or tax season.
• Automatic 1099 Prep: Payment data syncs with vendor records, and draft 1099s are auto-generated, thereby removing manual data entry errors and saving finance teams hours of work.
• Seamless E-Filing: Automation tools can file 1099s electronically with the IRS and deliver copies to vendors before the deadline, ensuring compliance with 2025’s tighter e-filing requirements.