What Is Backup Withholding?

Backup withholding is when the Internal Revenue Service (IRS) requires taxpayers to withhold a part of certain payments they may receive throughout a calendar year. This withheld money is later used as a payment when the taxpayer files their tax return. This act is put in place to ensure that taxpayers pay their taxes.

Backup withholding can apply to various forms of income, including dividend payments, interest payments, and some other forms of income. In most cases, the IRS will notify the payer of the amount they need to withhold, and the payer will then withhold that amount from the payments they make to the taxpayer throughout the year. For example, if someone receives $200 in dividends this year, the IRS may decide that $10 needs to be withheld for backing withholding. Therefore, that person will only receive $190 in dividends for that year.

Why Does Backup Withholding Exist?

The main purpose of backup withholding is to ensure that taxpayers pay the taxes that they owe. The IRS will issue backup withholding orders to taxpayers who don’t file their tax returns or have failed to pay taxes that they have previously owed. This action is to ensure that if the taxpayer does owe taxes, that it will be paid.

When taxpayers receive payments such as dividend payments or interest payments that are subject to backup withholding, they’ll be receiving a Form 1099, also known as a Notice to Recipient, from their payer. This form will serve to notify the taxpayer that a portion of their payment is going towards backup withholding.

How Do I Avoid Backup Withholding?

Taxpayers can avoid backup withholding by providing their payer with their correct taxpayer identification number (TIN) and certifying that the number is correct. To certify, taxpayers must fill out Form W-9, Request for Taxpayer Identification. By certifying that their TIN is correct, taxpayers can avoid having any of their payments subject to backup withholding.

It’s important for taxpayers to remember that not all forms of income are subject to backup withholding. In order to determine if certain payments are subject to backup withholding, taxpayers should consult the IRS website or the preparer of their tax returns for more information.