In accounting, a vendor is any outside party your company pays for goods or services — the seller side of a purchase transaction, as opposed to a customer, who pays you. The moment your business receives and records a vendor’s invoice, the amount owed becomes a liability in Accounts Payable and sits there until the bill is paid. That single relationship (you owe them, they delivered something) drives how vendor activity is classified, recorded, taxed, and documented.
Accounting departments tend to prefer “vendor” over the casual “supplier” because the word ties directly to the Accounts Payable function. Calling someone a vendor signals that your company owes, or will owe, them money for something already delivered or performed.
Vendor vs. Customer, Creditor, and Employee
These four categories get mixed up constantly, and each mix-up has a cost.
A customer is the mirror image of a vendor. Vendor activity shows up on the debit side of expense accounts and the credit side of Accounts Payable. Customer activity flows the other way, through Accounts Receivable and revenue accounts.
A vendor becomes a creditor the moment you record their invoice, because you now owe them a specific short-term debt. But “creditor” is the wider category: banks holding your business loans and bondholders are creditors too. Every vendor with an unpaid invoice is a creditor; not every creditor is a vendor.
The vendor-versus-employee line is the one that carries real tax exposure. Employees are paid through payroll, with income tax, Social Security, and Medicare withheld from each check and wages reported on Form W-2.1Internal Revenue Service. About Form W-2, Wage and Tax Statement Vendors are paid through Accounts Payable with no withholding, and qualifying payments are reported on Form 1099-NEC or Form 1099-MISC instead.2Internal Revenue Service. Reporting Payments to Independent Contractors Treating an employee as a vendor, or the reverse, can trigger penalties, back taxes, and interest.
How a Vendor Payment Hits the Books
Recording a vendor transaction takes two entries at two different moments.
When the invoice is approved, the accountant debits the relevant expense or asset account (Inventory, Utilities Expense, Office Supplies, whatever fits) and credits Accounts Payable for the same amount. Your balance sheet now carries a higher current liability, and, if it was an expense, your income statement reflects the cost.
When you actually pay the bill, you debit Accounts Payable (which clears the liability) and credit Cash (which reduces your bank balance). The vendor’s balance for that invoice drops to zero, and the money is out the door.
Early Payment Discounts
Many vendors offer a discount for fast payment. A term like “2/10 Net 30” lets you deduct 2% from the invoice if you pay within 10 days; otherwise, the full balance is due in 30. On a $10,000 invoice, that’s $200 saved. The journal entry debits Accounts Payable for the full invoice, credits Cash for the reduced amount you actually paid, and credits a Purchase Discounts account for the difference. The discount account reduces your overall cost of goods or expenses.
Tax Reporting Obligations for Vendor Payments
Collect a W-9 Before the First Check
Before paying a new domestic vendor, get a completed IRS Form W-9. It collects the vendor’s legal name, address, business structure, and Taxpayer Identification Number (TIN).3Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification You need the information to decide whether year-end reporting applies and, if it does, to make sure the IRS can match the payment to the right taxpayer. Collecting it before any money moves avoids the usual year-end scramble with vendors who have gone quiet.
1099-NEC vs. 1099-MISC
Two different 1099 forms cover vendor payments, and swapping them is a common error.
Form 1099-NEC reports nonemployee compensation: payments of $600 or more to individuals, partnerships, or estates for services performed for your business.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC Freelancers, consultants, and independent contractors go here.
Form 1099-MISC covers a different set of payments: $600 or more in rents, prizes and awards, medical and health care payments, and certain other categories.5Internal Revenue Service. About Form 1099-MISC, Miscellaneous Information Rent on your office space, for instance, belongs on 1099-MISC, not 1099-NEC, even though the landlord is a vendor.
Payments to C-corporations and S-corporations are generally exempt from 1099 reporting, which is exactly why the W-9 matters: the business structure the vendor checks determines whether you file at all. The main exceptions are payments to attorneys and medical or health care providers, which require 1099 reporting even when the recipient is a corporation.4Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC
Backup Withholding When the W-9 Isn’t There
If a vendor won’t provide a TIN or provides an incorrect one, you have a withholding obligation, not just a paperwork gap. The IRS requires payers to deduct and withhold 24% of reportable payments when the vendor fails to furnish a correct TIN.6Internal Revenue Service. Backup Withholding Pay a contractor $5,000 with no W-9 on file, and you should be withholding $1,200 and remitting it to the IRS. A properly completed W-9 avoids the issue entirely.7Internal Revenue Service. Instructions for the Requester of Form W-9 Most businesses just refuse to process a new vendor’s first payment until the W-9 arrives.
Foreign Vendors Follow Different Rules
If the vendor is outside the United States, the domestic W-9 and 1099 framework does not apply. The default federal withholding rate on U.S.-source income paid to foreign persons is 30% of the gross payment,8Internal Revenue Service. Tax Withholding Types reducible only if a tax treaty applies and the vendor provides the right documentation first. Foreign individuals complete Form W-8BEN; foreign entities complete W-8BEN-E.9Internal Revenue Service. About Form W-8 BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting Without the form in hand before payment, withhold the full 30%.10Internal Revenue Service. Instructions for Form W-8BEN Foreign vendor payments are reported on Form 1042-S rather than any 1099.2Internal Revenue Service. Reporting Payments to Independent Contractors
How Long to Keep Vendor Records
The IRS requires you to keep records that support the income, deductions, and credits on your tax returns. For most vendor-related expenses, that means retaining invoices, payment records, and contracts for at least three years from the date you filed the return that included them. If the payments relate to employment taxes (payments to a staffing agency, for example), keep the records for at least four years after the tax is due or paid, whichever is later.11Internal Revenue Service. How Long Should I Keep Records
Those are minimums. Underreport income by more than 25% of what’s on the return and the window stretches to six years. Never file a return at all and the IRS says keep records indefinitely. Many accountants apply a blanket seven-year retention policy across all vendor records because it covers the longest common limitation period without having to sort documents into different retention buckets.