Backup Withholding

Backup Withholding

Backup withholding is a tax that is withheld from certain payments made to taxpayers. The withholding is typically required when the taxpayer does not provide his Social Security number or does not provide accurate information. Backup withholding may also be required when taxpayers owe taxes or have outstanding debts. 

The payer will generally notify you if you are required to withhold backup withholding tax from the payment. The amount of tax to withhold will be based on the payment amount and the applicable tax rate. Here we provide a detailed overview of backup withholding. 

What is backup withholding? 

Backup withholding is a tax imposed by the Internal Revenue Service (IRS) on certain payments made to individuals, businesses, and other entities. The tax is withheld from the payment and is generally used to offset any tax liability the recipient may have. 

Businesses may also be subject to backup withholding if they fail to comply with certain tax requirements. For example, backup withholding may be required if a business does not withhold taxes from its employees’ paychecks. 

How does backup withholding work? 

Generally, backup withholding is only required on payments made to individuals, businesses, and other entities that are not exempt from taxation. However, there are a few exceptions to this rule. For example, certain government entities may be subject to backup withholding, even if they are exempt from taxation. 

When a business pays an individual for services, the business is required to withhold a certain percentage of the payment as income tax. This is called backup withholding. The withheld amount is sent to the IRS along with the business’ other tax payments. Backup withholding is usually only required if the individual still needs to provide their tax ID number or if the IRS has notified the business that the individual has not paid his taxes. 

Certain taxpayers are not subject to backup withholding. You may not be required to make backup withholdings if you have provided your name and SSN to the payer on Form W-9, they match the IRS records, and the IRS has yet to inform you that you are required to make backup withholdings. 

What payments are subject to backup withholding? 

The following typical payment forms might be subject to backup withholding for people who are not exempt: 

• Dividends 
• Governmental transfers 
• Commissions 
• Interest 

• Royalties 
• Gains from gambling 
• Rrents 
• Patronage 
• Broker commissions on stock transactions 

• Payments from owners of fishing boats 

What payments are “excluded” from backup withholding?

There are a few payments that are excluded from backup withholding. They include the following: 

• Property transactions 

• Repossessions and abandonments 
• Debt cancellations 
• Archer MSA distributions 
• Long-term care advantages 
• Withdrawals from any retirement account 

• Payments made under an employee stock ownership plan 
• Buying fish with cash 
• Unemployment benefits 
• Reimbursements of local or state income taxes 
• Earnings from approved tuition programs 

How can you stop backup withholding? 

The Internal Revenue Service (IRS) may require your employer to withhold a percentage of your income for federal taxes if you’re a US taxpayer. This is called backup withholding. You can avoid backup withholding by giving your employer a properly completed Form W-4, Employee’s Withholding Allowance Certificate. When you complete Form W-4, be sure to: 

• Claim the correct number of withholding allowances, or 
• Check the box on line 7 to have no federal income tax withheld. 

If you’re liable for backup withholding, you can stop it by paying the amount you owe. You can also contact the IRS to arrange an alternate payment plan.

Frequently Asked Questions