The Backup Withholding tax is a way for the IRS to get taxes from people who work in the United States, but refuse to file their taxes. Backup withholding has been around since 1996 and is simple enough that most people don’t even know it’s happening.
What Is Backup Withholding?
Backup withholding tax is applied for income that doesn’t normally require withholding based on the status of the taxpayer. The arrangement ensures that the IRS will receive the taxes owed on the income.
However, backup withholding tax only applies in very specific circumstances.
If you provided an incorrect TIN to a payer, have received an IRS withholding order, or received certain types of payments, you will be subject to backup withholding.
The IRS will inform the payer to withhold 24 percent of all payments to you until you resolve the issue that led to backup withholding. The backup withholding rate is 28%.
The most common types of payments that are subject to backup withholding are:
– Interest payments
– Payments for services performed by independent contractors
– Payments of rent, royalties, wages, and other compensation for services
When Is Backup Withholding Required?
Backup withholding tax may be charged in two situations:
If a payer receives an incorrect taxpayer identification number (TIN) from a taxpayer in the form of a Social Security number (SSN) or employer identification number (EIN), it must impose a backup withholding tax.
Backup withholding may be imposed on a taxpayer’s prior IRS record. If you’ve understated or failed to report interest or dividend income, you’ll be subject to backup withholding.
Furthermore, if you haven’t certified that you are not subject to the tax as a result of underreporting, you will be subject to it.
What Is the Backup Withholding Tax Rate?
If you don’t give your employer a complete tax return and pay enough taxes to cover the IRS’s share of your salary, you might be fined up to 24% of your overall income, regardless of how much money you’ve evaded in the past. Once again, the payer is responsible for ensuring that taxes are withheld.
What Payments Are Subject to Backup Withholding?
Backup withholding is commonly associated with interest and dividend payments from investments, but it applies to a variety of expenditures. In fact, backup withholding taxes are imposed on almost all taxable payments shown on Forms 1099 and W-2G. Here’s what they look like:
- Interest payments (Form 1099-INT)
- Dividends (Form 1099-DIV)
- Payment card and third-party network transactions (Form 1099-K)
- Some patronage dividends
- Rents, profits, or other gains (Form 1099-MISC)
- Commissions, fees, and contractor work (Form 1099-MISC)
- Broker/barter exchange payments (Form 1099-B)
- Some payments by fishing boat operators
- Royalty payments (Form 1099-MISC)
- Gambling earnings (Form W-2G)
- Original issue discount (Form 1099-OID)
- Some government payments (Form 1099-G)
Backup withholding does not apply to the following categories: exchange-traded funds, IRAs and other retirement accounts, business inventories/inventory financing (even though you may be taxed on capital gains), securities lending, tax proceeds from real estate transactions that were previously reported in a K-1 form, bad debts, long-term care benefits,
How to Know If You Are Subject to Backup Withholding
If the IRS believes you are subject to backup withholding, you will receive a CP2100 or CP2100A form notifying you. The notice will include a detailed list of all items on your file that are incorrect or missing. If the problem isn’t fixed, the IRS will notify the payer.
How to Remove IRS Backup Withholding
You can’t stop backup withholdings until the underlying reason is addressed. Providing an accurate TIN number to your payer might be as simple as that.
However, if you need to communicate unreported or underreported income with the IRS, it may be more difficult. Filing a missed tax return in many situations is how this needs to be
Get Help With IRS Backup Withholding Problems
If a payer is taking a portion of your salary for a sort of income that isn’t taxed, they were probably instructed to do so by the IRS. Taking care of the underlying reason can help you reclaim 24 percent from each check or payout rather than sending it straight to the IRS.
If you have questions regarding backup withholding, tax professionals are available to assist you with the IRS. With over 30 years of experience assisting our clients directly with the IRS, they’re qualified to help you with this problem.
Call now for a consultation to get your 24 percent back!