Every year we file our taxes, and every year it seems to get more complicated. Even though the IRS spells out its tax regulations and gives us instructions, the amount of forms to fill and regulations to understand can become overwhelming— and it doesn’t get any easier when you receive a backup withholding notice. Tax laws change annually, so if you make even a simple mistake, you could be in danger of receiving a backup withholding notice. Thousands of taxpayers across the country face tax issues every year. Whether it be a lien, a garnishment, a levy, or worse, many taxpayers like you suffer from the same anxiety and distress. Taxes are one of the largest stressors in the U.S. and it can take a massive toll on both your personal and professional life. In this post, we’ll define backup withholding, discuss who’s exempt, what to do if you receive a notice, and more. Who’s exempt from Backup Withholding Taxes? U.S. citizens or resident aliens are considered exempt from backup withholding if their reported name and Social Security Number matches the IRS records. Additionally, you are exempt if you have not been notified by the IRS that you are subject to mandatory backup withholding. When you receive a notice from the IRS, the envelope alone can be heart-stopping. Just seeing the title “IRS” emblazoned on the envelope can make you feel like the worst is about to happen, but this doesn’t need to be the case. No matter what your tax status or financial circumstance, the team at Community Tax can help you navigate your way to financial freedom.
What are Backup Withholding Taxes?The IRS imposes a backup withholding tax when they have a discrepancy with the SSN or TIN that you or your employer provided. The backup withholding tax is only imposed by the IRS upon certain types of income as a “just in case” measure so that you do pay some of your taxes. For federal tax purposes, backup withholding is sometimes mandatory. Many people are exempt from and never experience backup withholding taxes, so many wonders what to do when they receive the notice in the mail. There are a few instances when you may be subject to a backup withholding, like when you fail to report or have provided an incorrect taxpayer identification number (TIN). Most payments that are reported on Form 1099 can be subject to backup withholding. Payments from a Form 1099 are subject when you receive it from someone who doesn’t have your Social Security number. You may also recognize the phrase “subject to backup withholding” if you’ve ever filled out a W-9 form. Your employer is always required to file a form with the IRS, whether it be a W2, a 1099-MISC, or a 1099-DIV. The IRS then uses these forms to verify that the income you reported matches the income your employer says you earned. If for any reason your name, SSN, or TIN don’t match each other, this causes trouble on behalf of the IRS when they process your return. This is why you should always double check your W-2 form around tax season to make sure they reported the right numbers.
What Money is Subject to Backup Withholding?The purpose of a backup withholding tax is to ensure that you pay income taxes, regardless of whether you filled out a Form W-9 or if your information doesn’t match between you and your employer. Your employer is required to withhold some of your income before they pay it to you, just in case you owe the IRS. As mentioned before, a backup withholding can apply to almost any payment that’s reported on Form 1099. They can take a flat rate of 28% on payments based on the following:
- Commissions, fees, and other payments for work you perform as an independent contractor.
- Form 1099-G payments under IRC 6041 and 3406(b)(3)(A) which include taxable grants and agricultural payments (1099-G Box 6 or 7).
- Gambling winnings
- Interest payments
- Original Issue Discount, if the payment is in cash
- Patronage dividends
- Payments by brokers/barter exchanges
- Payment card and third party network transactions
- Payment dividends (only if half the payment is in money)
- Payments by fishing boat operators, but only the portion in money that represents a share of the proceeds
- Royalty payments