What Is Backup Withholding?
Backup withholding is a federal tax mechanism that applies when taxpayers fail to provide a correct taxpayer identification number (TIN) or have unresolved issues regarding income underreporting. When backup withholding occurs, payers withhold 24% of certain payments—such as interest, dividends, and non-employee compensation—and send this amount to the IRS. This process ensures that taxes are collected, even if taxpayers do not meet their reporting obligations. Typically, backup withholding is triggered by an IRS notification concerning incorrect or missing TINs or a history of underreporting income.
When Does Backup Withholding Apply?
Backup withholding applies in the following cases:
- You provided an incorrect TIN on Form W-9.
- You failed to supply a TIN at all.
- You received an IRS notice about underreporting interest or dividend income.
- You did not certify your exemption from backup withholding.
Payments Subject to Backup Withholding
| Type of Payment | Subject to Backup Withholding? |
| Interest Payments | Yes |
| Dividends | Yes |
| Non-Employee Compensation | Yes |
| Broker and Barter Transactions | Yes |
| Rent Payments | Yes |
| Royalties | Yes |
| Fishing Boat Payments | Yes |
| Prizes and Lottery Winnings | Yes |
| Wages | No |
Frequently Asked Questions
1. How can I avoid backup withholding?
To avoid backup withholding, simply provide a correct TIN on Form W-9. Additionally, respond promptly to any IRS notices regarding mismatches or underreported income.
2. Which payments are subject to backup withholding?
Payments subject to backup withholding include interest, dividends, non-employee compensation, broker transactions, and certain rents and royalties.
3. What is the rate for backup withholding?
The current rate for backup withholding is 24%.
4. Who is exempt from backup withholding?
Corporations, tax-exempt organizations, and government agencies are usually exempt, provided they file the correct forms.
5. How do I know if backup withholding applies to me?
You’ll receive a notice from the IRS or payer if backup withholding is required due to a missing or incorrect TIN.
6. How can I recover overpaid backup withholding?
You can claim any overpaid amount as a credit on your tax return. Dimov CPA can assist you with this process.
