In tax administration in the United States, backup withholding is the sending of a portion of a payment (such as a wage) to a tax authority instead of to the payee. This applies to the US IRS and the tax authorities of some states. For the IRS, it applies to some payments reported on Form 1099 which must be submitted to the IRS by financial institutions and businesses making certain income payments. Factors that necessitate backup withholding include:

  1. Incorrect taxpayer identification number (TIN)/ITIN/ATIN on Form W-9
  2. An IRS backup withholding order
  3. Certain types of payments

Withholding rules

When an individual or entity opens a new account, makes an investment, or begins receiving payments that are to be reported on Form 1099, they must provide their taxpayer identification number (TIN) to the respective institution. In turn, the institution issues a Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form. The individual or entity must enter their TIN on the form. If the account or investment accrues interest or dividends, they must also certify that they are not subject to backup withholding due to prior under-reporting of interest and dividends.

The payer is required to withhold 24% of the payment in the following scenarios:

  1. Failure to provide the TIN in the required manner.
  2. Notification from the IRS that the provided TIN is incorrect.[1]
  3. IRS instruction to withhold interest or dividends due to under-reported amounts. The IRS will only issue this directive after sending four notices over at least a 120-day period.
  4. Failure to certify exemption from backup withholding for under-reported interest and dividends.

Prevention and resolution

If a payer issues a "B" notice, indicating an incorrect TIN, individuals can usually prevent or stop backup withholding by providing the correct name and TIN to the payer. Certification of the accuracy of the TIN is crucial. In the event of a second "B" notice, verification of the TIN from the Social Security Administration or the IRS is required.[2]

If notified of under-reported interest or dividends, individuals must request and receive a determination from the IRS to prevent or stop backup withholding.

Tax return treatment

If income tax has been withheld under backup withholding, individuals should claim credit for it on their tax return for the year in which the income was received.

For more comprehensive information on backup withholding, refer to Publication 1281, "Backup Withholding for Missing and Incorrect Name/TIN(s)", which outlines procedures for payers, and Publication 505, "Tax Withholding and Estimated Tax".

State backup withholding

Some states may also require backup withholding if it is already required by the IRS:

References

  1. ↑ "Internal Revenue Service | An official website of the United States government". www.irs.gov. Retrieved 2023-12-12.
  2. ↑ "Internal Revenue Service | An official website of the United States government". www.irs.gov. Retrieved 2023-12-12.
  3. ↑ "Instructions". Vermont Department of Taxes. What payments are subject to Vermont Income Tax Withholding?
  4. ↑ "Updated Withholding Tables for Individual Income Tax" (PDF). Maine Revenue Services. July 28, 2017. Archived from the original (PDF) on 2017-10-25.
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