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What is Backup Withholding?


Taxpayers who receive certain types of income are required to report that income on what is known as an information return. Generally, in these cases, the business or person paying the taxpayer in question won’t be required to withhold taxes from those payments because the payee is expected to report and pay taxes on the amount themselves. There are, however, certain situations when the payer will be required to withhold a specific amount from a person’s payment, namely in cases that involve interest payments, dividends, and commissions. This is known as backup withholding and it comes with a number of specific reporting requirements, so if you have questions about whether you must comply with backup withholding rules, please reach out to our experienced tax and IRS legal team for help.

Who is Subject to Backup Withholding?

Backup withholding is a method used by the IRS to collect taxes on income that investors may have already spent before their tax bill is due. However, only certain types of payment are subject to backup withholding rules, including:

  • Interest payments;
  • Dividends;
  • Payments cards and third party network transactions;
  • Patronage dividends if at least half of the payment takes the form of money;
  • Rents, profits, and other gains;
  • Commissions, fees, and payments for work completed as an independent contractor;
  • Payments by brokers or barter exchanges;
  • Royalty payments;
  • Gambling winnings; and
  • Certain government payments.

Essentially, backup withholding can apply to most of the types of payments that are reported on Forms 1099 and W-2G. However, certain types of payments are also specifically excluded from backup withholding, including:

  • Real estate transactions;
  • Foreclosures;
  • Cancelled debts;
  • Long-term care benefits;
  • Retirement account distributions;
  • Distributions from employee stock ownership plans;
  • Unemployment compensation; and
  • State or local income tax refunds.

For help determining whether your own income is subject to backup withholding, please call our office today.

What is the Backup Withholding Rate?

Currently, the backup withholding rate is 24 percent, which means that certain payers are required to withhold 24 percent from a person’s future payments to ensure that the IRS receives the tax due on that income. Backup withholding can be required in a number of situations, but is usually the result of:

  • A taxpayer failing to provide his or her correct taxpayer identification number (TIN) to the payer; or
  • A taxpayer’s failure to report interest and dividend income.

To stop backup withholding, a taxpayer must correct the reason for the method’s initiation, which could require providing the correct TIN to the payer, resolving underreported income and paying what is owed, or filing a missing return.

Call Us Today for Help with Your Tax Problem

Being the subject of backup withholding can be frustrating, especially when it is the result of a mistake, so if your own income is being taxed and withheld under the backup withholding method and you have questions about your rights and obligations, please call experienced Florida tax & IRS lawyer Ronald Cutler, P.A. today for help. You can reach a member of our legal team by calling 386-490-9949 or by completing our brief online contact form.