When backup withholding applies, the IRS requires a payer to withhold tax from certain payments to vendors, suppliers, contractors, etc. If a vendor, supplier, contractor, etc., either fails to provide you with their tax information, provides incorrect tax information, or the IRS has notified you, you would be responsible for withholding taxes from any payment you owe them. The current backup withholding rate is 24%. For example, if you are paying them $1,000, then you will hold out $240 and pay it to the US Treasury and show the taxes withheld on their 1099.
What kind of payments are subject to backup withholding?
Backup withholding can apply to most kinds of payments reported on Form 1099, including, but not limited to:
- Interest payments;
- Rents, profits, or other income;
- Commissions, fees, or other payments for work performed as an independent contractor;
- Payments by brokers and barter exchange transactions;
- Payment Card and Third-Party Network Transactions; and
- Royalty payments;
Backup withholding also may apply to gambling winnings that aren’t subject to regular gambling withholding.
When can you stop backup withholding?
If the person or company for which you are doing backup provides you with their tax info or corrects the wrong information they initially provided, then you can stop backup withholding. Keep in mind, if you have to send a second notice to them, then they’ll need to provide you with a copy of their social security card that shows their correct name and SSN, or if it’s an entity then something from the IRS showing their legal name and EIN.
We highly recommend that you have a potential vendor, supplier, or contractor complete a Form W-9 prior to engaging in business with them and use the IRS TIN matching program to validate tax information.
Source: Internal Revenue Service (IRS)
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