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What to know about backup withholding

Posted on July 25, 2022

Backup withholding sounds confusing. So what is it and why do we need it?

Mike Poynter, senior CPA at Teipen CPA Group explains. “Under tax law, payers are responsible for knowing who they are paying. To accomplish this, payers are required to collect the legal name and taxpayer identification number, or TIN, from vendors they pay.”

“Generally, backup withholding is required when a service vendor does not provide the payer their TIN timely or accurately. This type of withholding can apply to most payments reported on certain Forms 1099 and W-2G.”

Here’s what taxpayers should know about backup withholding:

  • Backup withholding is required on certain non-payroll amounts when certain conditions apply.
  • 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.
  • 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.The current rate 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
  • 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, if not subject to gambling withholding
  • Taxable grants
  • Agriculture payments

If you need more information to keep your business in compliance, our CPA team can help. We know small-to-medium-size business tax law inside and out.