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What to Know About Backup Withholding

 

Taxable income includes more than just your salary. You may be subject to backup withholding, and the payer — that is, the bank or other business that made the payment to you — must withhold at a flat 24% rate when:

  • You don't give the payer your TIN in the required manner.
  • The IRS notifies the payer that the TIN you gave is incorrect.
  • The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices within at least a 120-day period.
  • You fail to certify that you're not subject to backup withholding for underreporting of interest and dividends.

To stop backup withholding, you need to correct the reason you became subject to it in the first place. Backup withholding can apply to most kinds of payments reported on Form 1099, including:

  • Interest payments (Form 1099-INT).
  • Government payments (Form 1099-G).
  • Dividends (Form 1099-DIV).
  • Patronage dividends, but only if at least half of the payment is in money (Form 1099-PATR).
  • Rents, profits or other income (Form 1099-MISC).
  • Commissions, fees or other payments for work performed as an independent contractor (Form 1099-NEC).
  • Payments by brokers and barter exchange transactions (Form 1099-B).
  • Payments by fishing boat operators, but only the part that's in money and represents a share of the proceeds of the catch (Form 1099-MISC).
  • Payment card and third-party network transactions (Form 1099-K).
  • Royalty payments (Form 1099-MISC).

Change the Status

You can prevent backup withholding from starting, or stop it once it's begun, by giving the payer your name and TIN and certifying that the TIN you give is correct. If you receive a second notice from the payer, you'll need to provide a copy of your Social Security card showing your correct name and Social Security number.

If your Form 1099 shows an amount withheld under the backup withholding rules, report the amount as "federal income tax withheld" on your income tax return for the year you received the income.

If you operate as a partnership or subchapter S corporation, any backup withholding only can be claimed by the partners and shareholders, who report their respective shares of the withheld amounts on their individual tax returns. The amounts aren't refundable to the partnership or subchapter S corporation.

When you open a new account, make an investment or begin to receive payments reportable on Form 1099, you must provide your TIN. For certain types of payments, you must provide the TIN in writing and certify under penalty of perjury that it's correct.

Banks and other businesses will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form. If your account or investment will earn interest or dividends, you must certify that you're not subject to backup withholding due to previous underreporting of interest and dividends. You'll need to correct your TIN to resolve any underreported income, pay the amount owed and file the missing return if you failed to do so originally.

Does this sound confusing? We can help you sort through the details. If you're having a problem, give us a call.

 
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Coulter & Justus, P.C.
Coulter & Justus, PC
(865) 637-4161
9717 Cogdill Rd, Suite 201
Knoxville, TN 37932
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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