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Understanding backup withholding

Posted on September 25, 2021

Backup withholding, according to Mike Poynter, CPA at Teipen CPA Group, is “a federal tax on income that otherwise typically doesn’t require tax withholding, such as 1099 and W2-G income. Those who receive this type of income may have backup withholding deducted from their payments.”

Here’s how that works:

  • Backup withholding is required on some non-payroll amounts when specific conditions apply, including when:
    1) The individual making such payments to the payee doesn’t generally withhold taxes, and

          2) The payees report and pay taxes on this income when they file their federal tax returns. (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.)

  • Backup withholding rate (currently 24%) is a percentage of the payment
  • Payments subject to backup withholding include:
  •    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
    • Royalty payments
  • Gambling winnings (if not subject to gambling withholding)
  • Taxable grants
  • Agriculture payments

Confused? Here are some examples when the payer must deduct backup withholding:

  • If a payee has not provided the payer a Taxpayer Identification Number, Social Security number, Employer Identification Number, Individual Taxpayer Identification Number, and/or Adoption Taxpayer Identification Number.
  • If the IRS notified the payer that the payee provided a TIN that does not match their name in IRS records, and the payer does not secure the correct TIN from the payee. Payees should make sure that the payer has their correct name and TIN to avoid backup withholding.

If you or your employer has a question about backup withholding eligibility, we can help with up-to-date information. Just give us a call.