May 15, 2020

The hidden cost of “B” notices: More expensive than you think

Certain steps may reduce your risk of receiving a backup withholding notice from the IRS.

Getting a notice from the IRS is rarely a pleasant experience. Whether it’s a warning that a balance is overdue or that an audit is coming up, such letters can trigger a variety of emotions, from indignation and anger to uncertainty and fear. For businesses that rely on an independent contractor (IC) workforce, however, one of the most frustrating, costly and time-consuming notices is without a doubt the “B” notice.

“B” notices result from a mismatch between IRS records and the tax identification number (TIN) on a non-employee worker’s 1099 Form. The IRS calls them “B” notices because a failure to respond initiates a mandatory backup withholding of 28% on future payments to the workers in question. These notices come in two parts:

  1. The first notice (CP2100) is sent by the IRS to the payer, who has 15 days to send the associated “B” notice to the contractor along with a copy of Form W-9 to be completed correctly.
  2. The second notice tells the payee to contact the IRS directly to obtain the correct combination of name and TIN and should not be forwarded with a W-9.

TIN errors can happen for a variety of reasons. The first and perhaps most obvious is the typo; maybe the TIN—which could be an IC’s own Social Security number (SSN) or Employer Identification Number (EIN)—was simply typed incorrectly, as can sometimes happen when filling out reems of paperwork. But it could also be the result of administrative errors or even falsified information from a contractor who is not the person they claim to be.

You might be thinking that “B” notices sound trivial; after all, how much could it possibly cost to correct a typo? Indeed, some companies write off “B” notices as the cost of doing business, planning their margins around such roadblocks as if they’re inevitable. It is important to remember, though, that these inevitabilities can cost you more than you might think.

Why you should worry about “B” notices

On the surface, dismissing “B” notices as just another business expense seems like a reasonable reaction, considering a single notice only results in an initial penalty of $100 to $260 per incorrect TIN—a small price to pay for many businesses. But, when evaluating your strategy for dealing with IRS notices, you should keep a few factors in mind:

  1. Penalties stack per TIN. For businesses that work with dozens or even hundreds of ICs (such as those in logistics and delivery), administrative errors across multiple 1099s can result in accumulated fines in the thousands of dollars.
  2. You might not know who you’re contracting. During contracting, an IC could fill out a W-9 using business info and an EIN, but what if the EIN matches the individual while the business is a DBA? Or what if the IC submits an incorrect SSN but you don’t have a verification system in place? A lack of clarity here could create exposure in the event of a future misclassification claim.
  3. It’s just the tip of the iceberg. Fixing a notice is often easier said than done and may lead to larger potential complications for your business.

In short, when thinking about “B” notices, you need to consider the hidden costs. Be sure to ask yourself, what impact will this have beyond the penalty?

Identifying the hidden costs

There is an administrative burden associated with correcting information required by the IRS. Depending on how many out-of-compliance individuals are listed on a report, this can require scouring your records, TIN checking all independent workers, issuing and tracking all “B” notice notifications, performing follow-ups, and enforcing new withholding requirements if necessary. For some businesses, it can take up to two weeks to address all the items outlined in a single “B” notice and then follow through to ensure they are corrected.

The second hidden cost is the impact on the ICs you work with. As mentioned, if a “B” notice goes uncorrected, the IRS sets a default backup withholding rate of 28% for future payments to affected workers. It should come as no surprise that withholding nearly a third of their settlement could dissuade ICs from working with you in the future.

Finally, sending incorrect data to the IRS may cause them to evaluate whether other concerns exist within your independent workforce model—errors the government could interpret as signs of possible misclassification of workers. Even if the workforce model is proven to be 100% compliant, nobody wants to deal with a costly and distracting audit.

These examples explain why you should beware the “B” notice, but what should you do if one arrives on your doorstep? Better yet, how can you avoid receiving one in the first place?

Avoiding “B” notices with a more consistent model

To pinpoint why “B” notices happen—and break down how to avoid them—let’s take a deeper dive into the two places where mistakes are most often introduced: during the collection of data from ICs and during the reporting of that data to the IRS.

Whenever an IC submits a Form W-9, there is a chance, however slim, that it may contain errors or false information. If you are dealing with many ICs, this onboarding data could also be stored incorrectly or misplaced altogether. When it comes time to submit the data to the IRS, other errors could be introduced. The more times information changes hands, the more likely it is that something could go wrong.

Naturally, the first step toward mitigating the introduction of errors is to find a system that specializes in reducing them without requiring additional administrative work. Openforce’s independent contractor management platform provides a worry-free experience from onboarding to settlement, integrating a comprehensive suite of checks, validations and tools that eliminate errors while also reducing compliance risk. Here’s how it works in three steps:

  1. You decide to contract with an IC.
  2. The contractor begins enrollment via Openforce, entering all required information into our secure portal, including their TIN.
  3. Our system verifies with IRS databases that every piece of information is accurate; if an error exists, the system stops onboarding and alerts all involved.

Preventive practices are, hands down, the best way to avoid not only “B” notices but also many of the stumbling blocks that can set your business back during dealings with ICs.

Ready to build best practices into every stage of your contracting process? Contact Openforce today using the form below or by emailing sales@oforce.com.

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Openforce® is the leader in technology-driven services that reduce operating costs and mitigate risk for companies using independent contractors. Our cloud-based applications help companies and contractors alike achieve more sustainable, profitable growth by removing financial, operational, and compliance barriers to getting business done.