What is a Backup Withholding?

When it comes to filling out paperwork, making a mistake once in a while is to be expected. But when mistakes are made in tax documents or tax returns, the results can be costly and stressful. It can be as simple as one number being off in the SSN or TIN that your employer gives to the IRS, and suddenly you’re having problems.

Backup withholding is a perfect example. It happens when the IRS notices missing or inaccurate information, or some other kind of mistake, in 1099 or W2-G income.

What is a Backup Withholding Tax?

The IRS can apply backup withholding to income payments that don’t have taxes withheld from them in order to ensure that they get their due. The rate is typically 24%.

When is Backup Withholding Required?

Generally, backup withholding is applied to specific forms of 1099 income. It may be done because:

You provided an incorrect taxpayer identification number (TIN) to an employer, which they then passed on to the IRS.
You underreported or didn’t include dividend income in your federal tax return, or didn’t certify that you’re not subject to backup withholding for doing so.

How Backup Withholding Works

How backup withholding is actually done depends on the reason it’s being done.

Withholding Due to Incorrect Information

If backup withholding is going to be done because the name or TIN in your tax documents isn’t accurate, the IRS will notify you of that fact. They should attempt to correct the information before moving forward with backup withholding.

The party with your information on file needs to file Form 945, Annual Return of Withheld Federal Income Tax on a yearly basis, and notify you of what they’re withholding.

Withholding Due to Unreported Interest or Dividends

If backup withholding is going to be done because of unreported or underreported dividends or interest income in your tax returns, the IRS will send you four notices in a 210-day period to ensure that you’re aware of their intent to withhold from you in the future.

You can prevent the IRS from actually following through on these notices by filing a new, accurate return or correcting the existing return. If you believe that backup withholding will create unreasonable financial hardship for you, you can plead your case to them. You can also do this if you believe their assessment was inaccurate.

Payments Subject to Backup Withholding

Income that backup withholding can be applied to includes:

  • Certain Gambling Winnings (Form W-2G)Certain Government Payments (Form 1099-G)
  • Commissions, fees, or other payments for performed by independent contractors (Form 1099-MISC)
  • Dividends (Form 1099-DIV)
  • Interest payments (Form 1099-INT)
  • Original Issue Discount (Form 1099-OID)
  • Payments by fishing boat operators (limited to the earnings that represent a share of catch proceeds (Form 1099-MISC)
  • Payment Card and Third Party Network Transactions (Form 1099-K)
  • Patronage dividends (if at least half of the earnings are in currency) (Form 1099-PATR)
  • Proceeds from Broker and Barter Exchange (Form 1099-B)
  • Rents, profits, or other gains (Form 1099-MISC)
  • Royalty payments (Form 1099-MISC)

Payments Excluded from Backup Withholding

Income that backup holding can’t be applied to includes:

  • Cancelled liabilities
  • Distributions from any retirement account
  • Distributions from an employee stock ownership plan
  • Distributions from Archer MSAs
  • Fish purchases for cash
  • Foreclosures and abandonments
  • Long term care benefits
  • Qualified tuition program earnings
  • Real estate transactions
  • State or local income tax refunds
  • Unemployment compensation

Prevent or Stop Backup Withholding

You can prevent the IRS from sending notices of their intent to apply backup withholding to your income by:

  • Providing a valid TIN to the payer(s) when completing payroll forms
  • Accurately reporting dividend income on your federal tax returns
  • Paying what you in taxes on your dividend income

Get Help with IRS Backup Withholding Problems

If you’re currently experiencing backup withholding or have been notified that it’s coming, the experts at Larson Tax Relief can help. We can evaluate your situation and recommend solutions for free. All you have to do is call us at 888-589-0955 or fill out our online form. We’ve helped over 18,000 clients across all 50 states, and our quality of service has earned us an A+ rating from the Better Business Bureau.

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