Tips for Taxpayers: Backup Withholding

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Tips for Taxpayers: Backup Withholding

November 9, 2020

Taxpayers receiving certain types of income typically reported on certain Forms 1099 and W-2G may need to have backup withholding deducted from these payments. Here are three tips to help taxpayers understand backup withholding:

1. Backup withholding is required on certain non-payroll amounts when certain conditions apply.

The payer making such payments to the payee doesn’t generally withhold taxes, and the payees report and pay taxes on this income when they file their federal tax returns. There are, however, situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income.

2. Backup withholding is set at a specific percentage. For 2020, it is 24 percent.

3. Payments subject to backup withholding include:

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, if not subject to gambling withholding
Taxable grants
Agriculture payments

Let’s take a look at a couple of examples of when the payer must deduct backup withholding:

Example 1: If a payee has not provided the payer a Taxpayer Identification Number (TIN).

A TIN specifically identifies the payee and includes Social Security numbers, Employer Identification Numbers, Individual Taxpayer Identification Numbers and Adoption Taxpayer Identification Numbers.

Example 2: If the IRS notified the payer that the payee provided an incorrect TIN.

If the TIN does not match the name in IRS records, then payees should make sure that the payer has their correct name and TIN to avoid backup withholding.

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