What Businesses Should Know About Backup Withholding And Reporting Non-Employee Compensation

Companies that hire independent contractors aren’t usually responsible for withholding income taxes, Social Security, or Medicare taxes from the pay of those individuals. They are, however, still required to report non-employee compensation of $600 or more to the IRS, using Form 1099-NEC. These forms must usually be submitted by January 31st every year. Where extensions may be available under certain hardship conditions, there is no automatic 30-day extension as there is for other reports. All non-employee compensation that is reportable on Form 1099-NEC is also subject to backup withholding if an independent contractor hasn’t provided a Taxpayer Identification Number to the employer.

What is Backup Withholding?

When a business hires an independent contractor, it isn’t usually required to withhold taxes from any payments they make, as it is assumed that the recipient will report and pay taxes on that income when he or she files an income tax return. There are, however, situations where the payer will need to withhold a certain percentage of tax to ensure that the IRS receives it. This requirement to withhold taxes from payments that aren’t otherwise subject to withholding is known as backup withholding. The current rate for backup withholding tax is 24 percent.

When is Backup Withholding Required?

Backup withholding may be required if a taxpayer failed to provide a correct taxpayer identification number (TIN) to the payer. A TIN can be a Social Security Number (SNN), an Employer Identification Number (EIN), or an Individual Taxpayer Identification Number (ITIN). Alternatively, a taxpayer could be required to engage in backup withholding if he or she:

• Failed to report interest and dividend income;
• Underreported interest and dividend income; or
• Failed to certify that he or she isn’t subject to backup withholding.

Furthermore, only certain types of payments are actually subject to backup withholding, including most payments reported on Forms 1099 and W-2G, such as:

• Attorney’s fees;
• Interest payments;
• Dividends;
• Payment cards and third party network transactions;
• Rents, profits, and other gains;
• Commissions, fees, and other payments for work completed as an independent contractor;
• Payments by brokers and barter exchanges;
• Royalty payments;
• Gambling winnings; and
• Certain government payments.

Real estate transactions, canceled debts, long-term care benefits, distributions from retirement accounts, and qualified tuition program earnings do not, however, require backup withholding.

How to Stop Backup Withholding

To stop backup withholding, a taxpayer will need to correct the reason that he or she became subject to it in the first place. This could require providing a correct TIN to the payer, resolving the underreported income and paying what is owed, or filing a missing return.

Meet with Our Tax Legal Team Today

If you own a business and have questions about reporting non-employee income or backup withholding, feel free to reach out to dedicated Florida tax and IRS attorney, CPA, and former FBI Special Agent Ronald Cutler, P.A. at 386-490-9949 for help. Initial consultations are conducted one-on-one and free of charge, so don’t hesitate to call or contact us online to set up an initial case review.

Sources:

irs.gov/forms-pubs/about-form-1099-nec

irs.gov/newsroom/what-businesses-need-to-know-about-reporting-nonemployee-compensation-and-backup-withholding-to-the-irs