Backup withholding | Nesteggg Accounting

If your business receives a backup withholding notice

If you are a taxpayer receiving certain types of income payments, the IRS requires the payer of these payments to report them on an information return (see types of payments below). The person or business paying you doesn’t generally withhold taxes from these types of payments, as it is assumed you will report and pay taxes on this income when you file your federal income tax return.

What is backup withholding?

There are situations when the payer is required to withhold at the current rate of 24 percent. This 24 percent tax is taken from any future payments to ensure the IRS receives the tax due on this income.

This is known as Backup Withholding (BWH) and may be required:

Under the BWH-B program because you failed to provide a correct taxpayer identification number (TIN) to the payer for reporting on the required information return. A TIN can be either your social security number (SSN), employer identification number (EIN), or individual taxpayer identification number (ITIN); or
Under the BWH-C program because you failed to report or underreported interest and dividend income you received on your federal income tax return; or you failed to certify that you’re not subject to BWH for underreporting of interest and dividends.

Payments subject to backup withholding

BWH can apply to most kinds of payments reported on Forms 1099 and W-2G, including:

Interest payments (Form 1099-INT)
Dividends (Form 1099-DIV)
Payment Card and Third Party Network Transactions (Form 1099-K)
Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR)
Rents, profits, or other gains (Form 1099-MISC)
Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-MISC)
Payments by brokers/barter exchanges (Form 1099-B)
Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC)
Royalty payments (Form 1099-MISC)
Gambling winnings (Form W-2G) may also be subject to backup withholding.
Original issue discount reportable on (Form 1099-OID), Original Issue Discount, if the payment is in cash
Certain Government Payments, Form 1099-G

Rules for receiving 1099-related payments

When you open a new account, make an investment, or begin to receive payments reportable on Form 1099, you must furnish your TIN in writing to the bank or other business and certify under penalties of perjury that it’s correct. In some cases, the bank or business will give you Form W-9, Request for Taxpayer Identification Number and Certification (PDF), or a similar form.

If your account or investment will earn interest or dividends, you must also certify that you’re not subject to backup withholding due to previous underreporting of interest and dividends.

How to prevent or stop backup withholding

To stop backup withholding, you’ll need to correct the reason you became subject to backup withholding. This can include providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate.

Credit for backup withholding

If you had income tax withheld under the backup withholding rule, report the federal income tax withholding (shown on Form 1099 or W-2G) on your return for the year you received the income.

Payments excluded from backup withholding

Payments that are excluded from backup withholding:

Real estate transactions
Foreclosures and abandonments
Cancelled debts
Distributions from Archer MSAs
Long term care benefits
Distributions from any retirement account
Distributions from an employee stock ownership plan
Fish purchases for cash
Unemployment compensation
State or local income tax refunds
Qualified tuition program earnings

Here’s what taxpayers need to know about backup withholding

Taxpayers who receive certain types of income may need to have backup withholding taken from these payments. Backup withholding can apply to most payments reported on Forms 1099 and W-2G.

Here are some facts to help taxpayers understand backup withholding and determine if they should have it withheld from their income payments.

First, here’s what backup withholding is…
The person or business paying the taxpayer doesn’t generally withhold taxes from certain payments. They don’t do this because it’s assumed the taxpayer will report and pay taxes on this income when they file their federal tax return. There are, however, situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income. This is what’s known as backup withholding.

Backup withholding is set at a specific percentage…
The current percentage is 24 percent.

Here are some payments subject to backup withholding…

Interest payments
Dividends
Payment card and third-party network transactions
Patronage dividends, but only if at least half the payment is in money
Rents, profits, or other gains
Commissions, fees, or other payments for work done as an independent contractor
Payments by brokers
Barter exchanges
Payments by fishing boat operators, but only the part that is paid in actual money and that represents a share of the proceeds of the catch
Royalty payments
Gambling winnings

Here are some situations when the payer must take out backup withholding…

If a taxpayer identification number is missing. A taxpayer identification number specifically identifies the taxpayer. This includes number like a Social Security number and an individual taxpayer identification number.
If the name provided does not match the name registered with the IRS for a specific TIN, taxpayers should make sure that the payer has their correct TIN.

More information:

For Small Business Week: Backup withholding rate now 24 percent, bonuses 22 percent; workers urged to do a Paycheck Checkup

WASHINGTON — The Internal Revenue Service today reminded small businesses that recent tax reform legislation lowered the backup withholding tax rate to 24 percent and the withholding rate that usually applies to bonuses and other supplemental wages to 22 percent. The agency also urged employers to encourage their employees to check their withholding using the IRS Withholding Calculator. [Read more…]