What does it mean to be subject to IRS backup withholding?
Being subject to backup withholding means a payer must withhold a portion of certain payments you receive and send it directly to the Internal Revenue Service. This usually happens after the IRS notifies the payer that withholding is required due to an issue with your taxpayer information or prior tax reporting. The withheld amount is credited toward your federal tax liability when you file your income tax return.
The IRS levies a tax known as “backup withholding” on certain payments to a payee that are not otherwise subject to withholding at the time of payment. As of January 1, 2018, the backup withholding tax rate dropped from 28% to 24%.
When does the IRS require backup withholding?
A payee may be subject to backup withholding under the following circumstances:
- Failure to complete Form W-9, Request for Taxpayer Identification Number, or the taxpayer provided an incorrect taxpayer identification number (Social Security Number, Employer Identification Number or Individual Taxpayer Identification Number). Form W-9 is required upon opening a new account, making an investment or receiving payments reportable on Form 1099
- Failure to report interest, dividend or patronage dividend income on income tax return.
What payments are subject to backup withholding?
Payments that may be subject to backup withholding include:
- Interest (Form 1099-INT)
- Dividends (Form 1099-DIV)
- Patronage dividends, but only if at least half of the payment is money (Form 1099-PATR)
- Rents, profits and other income (Form 1099-Misc)
- Royalties (Form 1099-Misc)
- Commissions, fees or other payments for work performed as an independent contractor (Form 1099-Misc)
- Certain payments made by fishing boat operations (Form 1099-Misc)
- Broker and barter exchange transactions (Form 1099-B)
- Payment Card and Third-Party Network Transactions (Form 1099-K)
- Gambling winnings, if not already subject to regular gambling withholding (Form W-2G)
How can backup withholding be prevented?
Backup withholding can be prevented by accurately completing Form W-9 and reporting the correct income on federal income tax returns.
If you receive a notice from a payer stating you haven’t provided a taxpayer identification number or that it’s incorrect, you can usually prevent backup withholding or stop it once you provide the correct name and taxpayer identification number.
How is the backup withholding reported on an income tax return?
If you were subject to backup withholding, the amount withheld will be reported on Form 1099 and should be reported as a payment toward the tax due on your federal income tax return for the year in which it is reported.