What you need to know about backup withholding

Taxpayers who receive certain types of income may need to have backup withholding taken from their payments. Backup withholding can apply to most payments reported on Forms 1099 and W-2G

Below are some facts to help you understand backup withholding and determine if you should have it withheld from your income payments.

What is backup withholding?

The person or business paying you doesn’t generally withhold taxes from certain payments. They don’t do this because it’s assumed that you (the taxpayer) will report and pay taxes on this income when you file your federal tax return. There are, however, situations when the person or business paying you is required to withhold a certain percentage of tax to make sure that the IRS receives the tax due on this income. This is known as backup withholding.

What percentage is backup withholding set at?

The current percentage is 24 percent.

What payments are subject to backup withholding?

  • Interest Payments
  • Dividends
  • Payment card and third-party network transactions
  • Patronage dividends, but only if at least half the payment is in money
  • Rents, profits, or other gains
  • Commissions, fees, or other payments for work done as an independent contractor
  • Payments by brokers
  • Barter exchanges
  • Payments by fishing boat operators, but only the part that is paid in actual money and that represents a share of the proceeds of the catch
  • Royalty payments
  • Gambling winnings

Why might the person or business paying me need to take out back up withholding?

  • If a taxpayer id number is missing. A taxpayer id number specifically identifies the taxpayer. This includes numbers like a Social Security number and an individual taxpayer id number
  • If the name provided does not match the name registered with the IRS for a specific TIN, taxpayers should make sure that the payer has their correct TIN