Backup Withholding and Form 1099 Miscellaneous

What is Backup Withholding and Form 1099?

Backup withholding requirements may apply to information returns that you file. The most common information return backup withholding would be reported on Form 1099. You may be required to withhold a specified percentage of certain reportable payments made to recipients, payees, under the law.

 

Form W-9 and Backup Withholding

For example, if you pay a service vendor, and the vendor has not provided the information requested on Form W-9, you should withhold federal income tax at 28 percent. Some other situations. The IRS alerts you to the fact that there’s a problem with an information return you filed, and you might need to withhold some payments you make to that vendor in the future. Perhaps it is a missing or incorrect Taxpayer Identification Number, also referred to as TIN. A TIN may be a Social Security Number issued by Social Security Administration, or an Employer Identification Number, EIN, issued by the IRS. A valid TIN is made up of exactly 9 numbers, and cannot contain letters.

 

Common payments subject to backup withholding

Some of the more common payments subject to backup withholding include interest, dividends, rents, royalties, commissions, reportable gross proceeds paid to attorneys, and nonemployee compensation. Backup withholding rate is 28 percent. Some of the payments that are excluded from backup withholding are real estate transactions, foreclosures and abandonments, retirement accounts, state and local government income tax refunds, and distributions from Archer Medical Savings Accounts. You may need to withhold from payments when a payee does not provide a Taxpayer Identification Number, or provides a Taxpayer Identification Number that we identify as being incorrect when we process the Form 1099 information return. Usually, a payer — you — collects this information on a Form W-9 prior to payment.

 

Form W-9 and Backup Withholding

The Form W-9 was revised in December 2014. You can go to our website, IRS.gov, to obtain the most current version of this form. Some payees may be exempt from backup withholding. For example, taxexempt organizations, government agencies, certain payments to corporations, and other entities listed in the Form W-9 instructions. Notice that the Form W-9 includes a separate line for the LLC classification. As a reminder, LLC stands for limited liability company, not a limited liability corporation. An LLC may be a corporation, partnership, or a single member LLC. There’s a space on the form to indicate which classification applies. The payee must fill in this space so you know if you should issue a Form 1099.

 

When to issue a Form 1099

Let’s go over some reminders on when to issue a Form 1099. Entities who have paid, in the course of trade or business, $600 or more for rents, services, prizes and awards, medical or health care payments, gross proceeds to an attorney, and certain other payments, are required to report these types of payments on Form 1099-Miscellaneous. Individuals and partnerships would get Form 1099, whereas most corporations wouldn’t. The exception to corporations whom you would have to file a Form 1099 for are medical and health care services, and attorneys. The term attorney includes a law firm or other provider of legal services. So even if they are incorporated, they still receive a Form 1099 if paid 600 or more. Payments that you don’t have to report on Form 1099-Miscellaneous are merchandise; wages paid to employees, including fringe benefits; payments of rent to real estate agents; payments to a tax-exempt organization; and corporations, unless the corporation is one of the exceptions listed in that second sub-bullet.

 

CP2100 and CP2100A Notices

CP2100 and CP2100A notices the IRS sends out to inform the payer that they may be responsible for backup withholding. The notice includes a list of missing, incorrect, or not currently issued payee TINs. Large volume filers, those who have 250 or more error documents, receive a CD or DVD data file CP2100. Mid-sized filers receive a paper CP2100 notice. And small filers will receive the paper CP2100A notice. Even if you haven’t you received a CP2100 notice, you may still be required to begin backup withholding in certain circumstances. If a vendor refuses or neglects to provide a TIN, you should withhold on any reportable payment. Continue to request the identifying information, and monitor payments you make to the vendor to ensure that either withholding is applied or the vendor has complied with your request for all identifying information on the Form W-9 or its equivalent. You must obtain a TIN from a payee even for a one-time transaction.

 

CP2100A Notice

If you do not, the law allows the IRS to charge a penalty if appropriate. You might receive a CP2100 notice if the IRS received an information return with taxpayer information that appears to be incorrect. For example, an identification number is considered incorrect when the TIN is displayed in the proper format, but the name/TIN combination doesn’t match our records. Or the TIN can’t be found in the IRS and/or the Social Security Administration files.┬áIf you refer to Publication 1281, entitled Backup Withholding for Missing and Incorrect Name TINs, you can read about the IRS matching process using name controls, and what you should do when you open an account for a payee.

 

CP2100 Notice

If you receive a CP2100 notice stating certain information is incorrect, the first thing you should do is compare the notice with the information that you have on file. Check your records first, and compare them with what the IRS has on record. If the notice indicates that you have missing TINs, check to confirm whether you already backup withhold on the account. If not, the next time you pay the vendor, begin backup withholding until you receive the TIN. You might wonder what IRS considers a missing TIN, as you are certain all the 1099s you filed had TINs on them. Well, a TIN is considered to be missing if it has more or less than 9 numbers, or it has an alpha character as one of the 9 numbers. You must make up to three solicitations or attempts to collect a TIN — the initial, first notice, and second notice — to avoid a penalty for failing to include a TIN on the information return. Document and keep your attempts to collect the correct vendor information. Remember, you’re obligated to take these steps.

 

Penalty for failure to deposit backup withholding

The IRS can assess a penalty for failure to deposit backup withholding for not filing a return such as the Form 945, and failing to pay associated taxes with the return. If you are subject to penalties, these penalties may be subject to interest once they are assessed. If you confirm that the information in your files is incorrect as it is, you are required to send what is called a “B” Notice within 15 days from the date you received the CP2100 notice, or the date the CP2100 or 2100A notice, whichever is later. See Publication 1281 for details.

 

When to Begin Backup Withholding

Begin backup withholding no later than 30 business days after the later of the date of the CP2100 notice or the date you received it. If the payee furnishes a TIN and signs the W-9 for a valid replacement, you should stop backup withholding no later than 30 days later. You must make the solicitation, a request for a payee’s correct TIN, to satisfy the backup withholding requirements and to avoid a penalty for filing another information return with a missing or an incorrect TIN. Your payee must furnish a certified TIN with the first solicitation on Form W-9 for payments of interest, dividends, and amounts subject to broker reporting. For other payments, the payee may furnish — provide a TIN in any manner.

 

Starting Backup Withholding

Begin backup withholding on payments made to payees who do not return a signed Form W-9 in response to the first “B” Notice, no later than 30 business days after the date of the CP2100 or CP2100A notice, or the date you received it, whichever is later. However, you may begin backup withholding the day after the date you received the CP2100 notice. Stop backup withholding no later than 30 calendar days after you receive the signed Form W-9 from the payee. You may stop backup withholding at any time within that 30 calendar day period.

 

Contact IRS About Backup Withholding