How Much Is Backup Withholding and When Does It Apply?
Businesses and financial institutions withhold a flat 24% of income as backup withholding for those taxpayers who are subject to the rule. It might apply to you if:
You failed to provide an accurate taxpayer identification number (TIN) to the payer. This is often a Social Security number.The IRS notifies the payer that the TIN you provided isn’t correct.You under-reported interest or dividends on income tax returns in the past. You’ll receive four warnings from the IRS before this applies to you.You fail to certify that you aren’t subject to backup withholding due to under-reported interest or dividends.
Which Payments Are Subject to Backup Withholding?
Backup withholding applies mostly to certain types of 1099 income, including:
Interest Dividends Patronage dividends Rents Gambling winnings Royalties Commissions and fees paid to independent contractors Payments from fishing boat operators
Which Payments Are Not Subject to Backup Withholding?
Certain kind of payments are exempt from backup withholding. These include:
Real estate transactions Foreclosures and abandonments Cancelled debts Long-term care benefits Retirement account distributions Employee stock ownership plan distributions Fish purchases for cash Unemployment compensation State or local income tax refunds Earnings from a qualified tuition program
Backup Withholding Due to Incorrect Information
Backup withholding due to submitting an incorrect name or TIN on Form W-9 can be prevented or stopped by supplying your payer with corrected information on Form W-9 as soon as possible. The IRS will send a notice, called a “B” notice, to the payer of income if it can’t match the name and TIN information you provided on your W-9. The notice alerts them that the TIN or the SSN they’re using doesn’t coincide with IRS records. The payer should send a copy of the “B” notice to you before it begins backup withholding. The payer can request verification or proof of the correct information, such as a Social Security card or tax return bearing your name and number.
Backup Withholding Due to Unreported Interest or Dividends
The IRS will notify you by mailing four notices over a period of 210 days to alert you of future backup withholding if you’ve failed to report or under-reported interest or dividends. You can ask the IRS not to resort to backup withholding or to stop it after it’s begun. But you must establish that one of four acceptable circumstances exists:
You did not under-report interest or dividends earned. You reached out to the IRS about whether an under-reporting actually occurred, but the matter has not been resolved yet. Backup withholding will create an undue hardship for you. It’s unlikely that you will under-report interest and dividends in the future. It was an honest error. You need the money that would be withheld from you. You either filed an amended return that properly reports all interest and dividends (as well as paying taxes, penalties, and interests due), or you filed an original return reporting the income if you didn’t previously file one.
The IRS will provide you with certification and will notify any payers who were sent notices if it determines that backup withholding isn’t required or that it should stop.
