What Do You Need to Know About Backup Withholding?
What triggers backup withholding with the IRS?
Backup withholding is triggered by the IRS when a taxpayer has failed to provide a correct Taxpayer Identification Number (TIN) to a payer, has underreported interest or dividends, or has failed to certify that they are not subject to backup withholding. In these scenarios, the payer is required to withhold a percentage of payments (currently 24% in 2024) and remit it to the IRS on the taxpayer's behalf.
Backup withholding acts as a safety net for the IRS to ensure taxes are paid on certain types of income, primarily interest, dividends, and other reportable payments. It's not a penalty, but rather a method to pre-collect taxes when there's reason to believe the taxpayer may not be fulfilling their tax obligations. Common situations leading to backup withholding include using an incorrect Social Security Number (SSN) or Employer Identification Number (EIN) when opening a bank account or investing, or failing to report all interest or dividends received on a previous tax return. The IRS notifies payers when they need to start backup withholding for a particular payee. Taxpayers receiving these notices should promptly address the underlying issue. This often involves correcting their TIN information with the payer and potentially contacting the IRS to resolve any outstanding tax issues that triggered the withholding in the first place. Once the issue is resolved, the IRS will notify the payer to stop backup withholding.How do I avoid backup withholding?
The best way to avoid backup withholding is to provide your correct Taxpayer Identification Number (TIN), usually your Social Security number (SSN), to the payer of the income, and to certify that the TIN is correct, that you are not subject to backup withholding due to notified payee underreporting, and that you are a U.S. person. This is typically done by completing Form W-9, Request for Taxpayer Identification Number and Certification.
Backup withholding is required by the IRS in certain situations to ensure that taxes are paid on income. Payers, such as banks or brokerage firms, are required to withhold 24% of reportable payments if any of these conditions exist: you fail to provide your TIN, the IRS notifies the payer that the TIN you provided is incorrect, the IRS notifies the payer that you are subject to backup withholding because you underreported interest or dividends, or you fail to certify that you are not subject to backup withholding. To correct any issues that lead to backup withholding, make sure your name and SSN match exactly as they appear on your Social Security card. If you've moved or changed your name, notify the Social Security Administration promptly. If you were notified by the IRS about underreporting and being subject to backup withholding, you'll need to resolve the underreporting issue with the IRS to have the backup withholding stopped. Contact the IRS directly to understand the specific reason and steps required to resolve the situation. Once the IRS notifies the payer that you are no longer subject to backup withholding, the payer will stop withholding.What income types are subject to IRS backup withholding?
Backup withholding applies to most types of payments reported on forms like 1099-NEC, 1099-MISC, 1099-DIV, 1099-INT, and W-2G. Generally, if you receive payments as an independent contractor, receive dividends or interest, or certain other reportable payments and fail to provide your Taxpayer Identification Number (TIN) to the payer or the IRS notifies the payer that your TIN is incorrect, the payer is required to withhold 24% of the payment amount and remit it to the IRS on your behalf.
Backup withholding serves as a safety net for the IRS to ensure taxes are paid on income where there's a risk of non-compliance. This risk typically arises when the payee fails to furnish their correct TIN (Social Security number, Employer Identification Number, etc.) to the payer. The IRS might also trigger backup withholding if there are discrepancies between the name and TIN on file. Payers are obligated to initiate backup withholding if they receive notification from the IRS that the payee's TIN is incorrect, regardless of whether the payee provided a TIN originally. It's important to remember that backup withholding isn't an additional tax. It's simply a way to prepay your tax liability. The amount withheld is credited against your total tax liability when you file your annual income tax return. If the backup withholding exceeds your tax liability, you'll receive a refund for the overpayment. To avoid backup withholding, always ensure you provide the correct TIN to payers, and verify that the name and TIN match IRS records.How do I claim backup withholding on your tax return?
To claim backup withholding on your tax return, you'll report the amount withheld on Form 1040. This amount will be listed in box 4 of Form 1099-MISC, 1099-NEC, or other applicable information returns you received. Enter the total amount of backup withholding shown on these forms on line 25a of the 2023 Form 1040.
Backup withholding is essentially a prepayment of your federal income tax. It's applied when you haven't provided a Taxpayer Identification Number (TIN) – usually a Social Security number (SSN) – to a payer, or when the IRS has notified the payer that your TIN is incorrect, or when you have failed to certify that you are not subject to backup withholding. The payer then withholds a percentage (currently 24%) of the payment and sends it to the IRS on your behalf. When you file your tax return, you'll calculate your total tax liability for the year. The backup withholding reported on your 1099 forms is then credited against this liability. If the amount withheld exceeds your total tax liability, you'll receive a refund for the difference. Be sure to keep all your 1099 forms and any other documentation related to the income you received, as they will be needed to accurately complete your tax return.What's the backup withholding tax rate?
The backup withholding tax rate is 24%.
Backup withholding is a measure the IRS uses to ensure taxes are paid on income when a taxpayer hasn't provided a Taxpayer Identification Number (TIN), such as a Social Security number (SSN) or Employer Identification Number (EIN), or when the IRS has notified a payer that the TIN provided by the payee is incorrect. It can also be applied if the IRS informs the payer that the payee has underreported interest or dividends. This means that instead of the income being paid to you in full, the payer is required to withhold 24% of it and send it to the IRS on your behalf. Essentially, backup withholding acts as a safety net. It's designed to catch instances where the IRS doesn't have confidence that the recipient will properly report and pay taxes on their income. Getting backup withholding removed requires resolving the issue that triggered it, such as providing the correct TIN to the payer and/or resolving any discrepancies with the IRS concerning underreported income. Contacting the IRS directly or working with a tax professional can help resolve these situations.How do I notify the IRS of a name or TIN mismatch to stop backup withholding?
To stop backup withholding due to a name or Taxpayer Identification Number (TIN) mismatch, correct the information with the payer *and* with the Social Security Administration (SSA) if the mismatch involves your Social Security number, or with the IRS if it involves your Employer Identification Number (EIN). Provide the payer with a Form W-9, Request for Taxpayer Identification Number and Certification, containing your correct name and TIN. Simultaneously, resolve any discrepancies with the SSA or IRS, depending on whose records contain the error, to ensure their records match the information you provide to the payer.
When the IRS notifies a payer that the name and TIN provided by a payee do not match IRS records (referred to as a "CP2100 notice"), the payer is legally obligated to begin backup withholding. Simply providing a corrected Form W-9 to the payer might not immediately stop the withholding. The IRS needs to update its records to reflect the correct information. To rectify the issue with the SSA (for individual taxpayers), visit the Social Security Administration website or call them to correct the name or Social Security number on your Social Security card. For businesses or entities with an EIN, contact the IRS directly, as outlined on the IRS website. Keep documentation of all communications and corrections made with both the payer and the relevant government agency. Once you've updated your information and confirmed that the IRS records are corrected, provide the payer with written confirmation if possible. This can expedite the process of stopping the backup withholding.What happens if backup withholding is incorrectly applied?
If backup withholding is incorrectly applied, meaning taxes were withheld when they shouldn't have been or at an incorrect rate, the affected individual or entity needs to take steps to correct the error. The primary solution involves filing the appropriate tax return (e.g., Form 1040 for individuals) and claiming a credit for the excess withholding. The IRS will then reconcile the withheld amount with the actual tax liability, and any overpayment will be refunded.