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Backup and Bonus Withholding Rates Lowered for Small Businesses


The recent tax reform legislation made a number of changes to the tax code by eliminating certain deductions and credits. One of the most important changes, for small business owners in particular, however, involves the lowering of the backup withholding tax rate, as well as the withholding rate that applies to supplemental wages and bonuses. To ensure that your own business is in compliance with the new tax legislation, please contact dedicated Florida tax and IRS attorney Ronald Cutler who can explain and help you implement the new changes.

Backup Withholding Rate 

Amongst the many changes made by the Tax Cuts and Jobs Act (TCJA), was the lowering of the backup withholding rate from 28 percent to 24 percent. Backup withholding comes into play in a variety of situations for small businesses, but perhaps most often when a taxpayer fails to supply his or her correct Taxpayer Identification Number (TIN) to the employer. Backup withholding rates also apply when an employee:

  • Fails to provide a TIN at all;
  • Gives a TIN in an improper manner;
  • Under-reports interest or dividend income on his or her tax return; or
  • Fails to certify that he or she is not subject to backup withholding for under-reporting or another mistake.

Whatever the reason for the application of backup withholding, this process allows employers to withhold tax from payments that would otherwise not be subject to withholding, such as interest payments, dividends, payments to independent contractors, and third-party network and payment card transactions. Once the deficit has been made up, however, and the employee has corrected the issue that caused it by providing his or her correct TIN, paying the amount owed for under-reported income, or filing a missing tax return, the employer must stop backup withholding.

Bonuses and Supplemental Wages  

In addition to changing the backup withholding rate for small businesses, the TCJA also lowered the withholding rate that applies to supplemental wages, such as:

  • Bonuses;
  • Back wages; and
  • Payments for accumulated leave.

The new rate is currently set at 22 percent, although for payments exceeding $1 million, the rate increases to 37 percent. This means that employers should withhold federal income tax on the value of supplemental wages and fringe benefits at the flat rate of 22 percent that was set by Congress, although they also have the option of adding the value of taxable fringe benefits to the person’s regular wages for a single payroll period, after which, they can calculate income tax withholding on the total amount.

Contact Our Office Today  

Though always a good idea, checking withholding is particularly important for business owners this year, especially given the number of changes to withholding rates put in place by the enactment of the TCJA. To speak with an experienced Florida tax law  attorney about these changes and how they could apply to your own business, please call dedicated attorney Ronald Cutler, P.A. at 386-490-9949. Initial consultations are conducted on a one-on-one basis and are also free of charge, so please don’t hesitate to call or contact us online at your earliest convenience.