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Reduced Withholding Rate For Small Businesses and Individual Taxpayers


As a result of changes made by the Tax Cuts and Jobs Act (TCJA), the backup withholding tax rate for individual taxpayers and small businesses was reduced from 28 to 24 percent. Backup withholding applies in a number of situations, including when a taxpayer doesn’t supply his or her taxpayer identification number (TIN) to a payer or when a taxpayer underreports interest or dividend income on a tax return. If you have questions about whether you are subject to backup withholding, you should strongly consider contacting a dedicated tax law attorney who can assist you.

When Does Backup Withholding Apply? 

Payees could be subject to backup withholding if they:

  • Forget to provide their TINs;
  • Provide an incorrect TIN;
  • Provide a TIN improperly;
  • Fail to properly report interest or dividends on their tax returns; or
  • Fail to certify that they are not actually subject to backup withholding due to a failure to accurately report interest and dividends.

TINs are usually assigned based on a taxpayer’s Social Security Number (SSN), although in some cases, they could be based on an Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN), or an Adoption Taxpayer Identification Number (ATIN).

What Kinds of Payments Does Backup Withholding Apply To? 

Backup withholding applies to almost any type of payment that is reported on a 1099, including:

  • Dividends;
  • Interest payments;
  • Patronage dividends, but only if at least 50 percent of the payment is in the form of cash;
  • Rents and profits;
  • Commissions, fees, and payment for work performed as an independent contractor;
  • Royalty payments;
  • Gambling winnings if they aren’t subject to regular gambling withholding;
  • Payments made by brokers;
  • Barter exchange transactions;
  • Payments made via card and third party network transactions; and
  • Payments made by fishing boat operators.

When backup withholding applies, a payer must withhold taxes from payments that would otherwise not be subject to this tax. Fortunately, the TCJA reduced the withholding tax rate not only for small businesses, but also for individuals from 28 percent to 24 percent.

How do I Stop Backup Withholding? 

To terminate backup withholding, an employer must correct the issue that caused the backup withholding to apply in the first place. This could include providing a correct TIN to the payer, resolving underreported income, paying the correct amount owed, or filing a missing tax return. Payees are also permitted to claim credit for any backup withholding that applies to them when they file their new tax return.

If I Withheld at an Incorrect Rate do I Need to Refund the Difference to an Employee? 

Even when a payer mistakenly backup withholds an incorrect amount based on the wrong rate, such as the old 28 percent tax rate, it is not required to refund the difference to the employee or payee. However, when an employer does choose to refund the difference, it is required to do so before the end of the year, so that enough time remains to make adjustments to federal tax deposits.

Call Our Office Today  

To schedule a one-on-one case evaluation with dedicated Florida tax attorney Ronald Cutler, P.A., please call 386-490-9949 or send us a brief online message.