If you’ve ever filled out a W-9 form, one of the things you had to certify was that you were not “subject to backup withholding.” Or, if you’ve received tax form 1099 from someone who didn’t have your Social Security number, you might have received less money than you were counting on because of backup withholding. Here we’ll discuss what backup withholding is, when it might be used, and how it affects your tax return.
When you earn any income or receive any money from a person or company, that person or company is usually required to file a form with the IRS, such as a W-2 form for a regular job, a 1099-MISC for contractor work, or a 1099-DIV for dividend payments. It allows the IRS to match up the income that other people report having given you with what you say you received during the year.
However, to correctly fill out that form, the person or company that gave you the money will need your Social Security number or Taxpayer Identification Number. Usually, they’ll request this information from you by having you fill out a W-9 form. If they don’t have this information, or your name and SSN or TIN don’t match, this causes problems for the IRS when they try to report having given you the money.
Many people incorrectly think if they earn some money, but avoid filling out a W-9, they won’t have to include that money as income on their taxes, and thus won’t have to pay income tax on it. While there are some situations in which you might not receive a 1099 or W-2, you are still legally required to report all of your income on your 1040 at the end of the year, and pay taxes on the correct amount, whether or not you got an official form.
Also, even if the company that paid you isn’t able to correctly fill out your form, they are still required to file it with whatever information they do have. And in many situations, they are required to withhold some of the money and send it to the IRS. Backup withholding makes sure that taxes are paid on your earnings, even if you did not fill out a W-9, or the information you provided isn’t correct or doesn’t match. If the person or company doesn’t have your Social Security number, they are required to withhold some of the money before they pay it to you, to cover the taxes you are likely to owe on that money.
When Are Taxes Withheld?
Under certain circumstances, the company that pays you the money can withhold 28% of the payment and send it to the IRS. Those circumstances include :
- If you refuse to provide your SSN or TIN to the payer (in which case backup withholding will start immediately)
- Don’t properly provide your SSN or TIN (usually, filling out a W-9)
- The IRS notifies the payer that the SSN or TIN you reported is wrong
- You do not tell the payer that you are NOT subject to backup withholding
- The IRS notifies the payer that you have underreported other interest or dividend payments
How Long Are You Subject to Backup Withholding?
If you have been notified that there is a problem with your W-9 by the payer before they pay you, you can just provide correct information and avoid backup withholding altogether. If you realize shortly after submitting the W-9 that the information you gave was not accurate, before the company notifies you, you can usually stop backup withholding before it starts by providing the correct information as soon as possible.
Once you begin having money withheld for backup withholding, it becomes more difficult to stop. If you had money withheld for backup withholding by a company you worked with one time, it generally wouldn’t affect whether other companies will also take money for backup withholding. However, if you’ve had money withheld from regular payments such as interest or dividends, the company will keep doing the backup withholding until they receive notice from the IRS to stop. If you want to stop the backup withholding once it has started, you will need to contact the IRS so that the IRS can notify the company to stop.
Who is Exempt from Backup Withholding?
The short answer is that you are very unlikely to be exempt, so don’t check it off unless you are sure. Government agencies, nonprofit organizations, banks, and corporations are exempt from backup withholding – individuals almost never are.
What Payments Might Be Subject to Backup Withholding?
- Interest payments or dividends
- Rents or other kinds of profits from a business
- Fees or payments you receive for working as an independent contractor
- Royalty payments
Gambling payments are also sometimes subject to backup withholding if a correct SSN or TIN is not supplied. Any kind of gambling winnings can be subject to backup withholding, and any bingo or slot machine winnings above $1,200 or keno winnings above $1,500 can be subject to backup withholding.
Wages are generally not subject to backup withholding because tax should already be withheld from the wages based on how you filled out Form W-4, so additional withholding is not needed.
What Happens to the Money that is Withheld?
The company that paid you will try to send you a copy of the form that they sent to the IRS. (If they do not have an accurate address for you either, this might be problematic.) The money that was withheld is a payment that’s already been made to the IRS, so you can add it to the other payments that have already been made, such as regular federal tax withholding from your paycheck. The backup withholding amount might get refunded to you if you don’t owe much or anything in taxes for that year.