What is backup withholding and what payments are subject to it?
Backup withholding is a type of withholding for federal income taxes on certain types of income. Banks or other businesses that pay you certain kinds of income must file an information return Form 1099 with the IRS. The information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). These payments generally are not subject to withholding.
Payments Subject to Backup Withholding
However, “backup withholding” is required in certain situations. The IRC 3406(a) requires payers under certain circumstances to withhold 28% for gambling winnings, and 31% for vendor payments as backup withholding taxes on payments of interest, rents, royalties, commissions, non-employee compensation, and certain other payments. Payments subject to backup withholding are defined in IRC sections 6041, 6041(a), 6042(a), 6044, 6045, 6049(a), 6050A, and 6050N. Backup withholding is required for governments under three circumstances
Federal income tax may be withheld at a flat rate of 28% on the following types of income:
- Interest payments ( Form 1099-INT (PDF))
- Dividends ( Form 1099-DIV (PDF))
- Patronage dividends, but only if at least half of the payment is in money ( Form 1099-PATR (PDF))
- Rents, profits, or other gains ( Form 1099-MISC (PDF))
- Commissions, fees, or other payments for work you do as an independent contractor ( Form 1099-MISC (PDF))
- Payments by brokers ( Form 1099-B (PDF))
- Royalty payments ( Form 1099-MISC (PDF)), and
- Certain other payments. (See Publication 505)
US citizens and resident aliens will be exempt from backup withholding if:
- Taxpayers properly report your name and Social Security number to the payer using Form W-9, and that information matches the IRS records, and
- Taxpayers have not been notified by the IRS that you are subject to mandatory backup withholding.
How to prevent or stop backup withholding
If you receive a “B” notice from a payer, notifying you that the TIN you gave is incorrect, you usually can prevent backup withholding from starting or stop backup withholding once it has begun by giving the payer your correct name and TIN. You must certify that the TIN you give is correct. If you receive a second “B” notice from that payer, you will need to provide the payer with verification of your TIN from the Social Security Administration or the IRS.
What is an IRS CP2100 or CP2100A Notice?
It is a notice which tells a payer that he or she may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs. Large volume filers receive a CP2100 all other filers will receive a CP2100A.
Large Filer…250 or more error documents
Mid Size Filer…Less than 250 error documents and greater than 50 error documents
Small Filer…Less than 50 error documents