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What the heck is backup withholding?

Posted on November 23, 2020

Taxpayers who receive certain types of income may have something called backup withholding deducted from these payments.

Here’s what’s going on with backup withholding and how it works from the CPAs at Teipen CPA Group:

  • Backup withholding is required on certain non-payroll amounts when certain conditions apply. Sounds vague. But the concept only works in certain situations, such as:
    • The payer making such payments to the payee doesn’t generally withhold taxes, and
    • The payees report and pay taxes on this income when they file their federal tax returns.
    • And – there are some 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 is set at a specific percentage.
Currently, that percentage is 24 percent.
  • 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
    • Certain payments by fishing boat operators
    • Royalty payments
    • Gambling winnings, if not subject to gambling withholding
    • Taxable grants
    • Agriculture payments

Our CPAs have handled backup withholding for numerous types of businesses. We know the rules front to (sorry) back.

For more information directly from the IRS, go to IRS.gov and search Backup Withholding “B” ProgramPublication 1281, Backup Withholding for Missing and Incorrect Name/TINs.

Or you are welcome to make a call to one of our experienced small business CPAs. We’ll help provide a few particulars so you and the IRS will be on the same page.