Backup Withholding
Definition
According to the Internal Revenue Service, in the US, backup withholding is a specified percentage withheld by the payers to be paid to the IRS on most kinds of transactions reported on variants of Form 1099. Backup withholding may be required for several reasons, including but not limited to...
What is 'Backup Withholding'
Backup withholding is the tax that is levied on investment income, at an established tax rate, as the investor withdraws it. Backup withholding helps to ensure that government tax-collecting agencies (such as the IRS or Canada Revenue Agency) will be able to receive income taxes owed to them from investors' earnings. Backup withholding may be applied when an investor has not met rules regarding taxpayer identification numbers (TIN). At the time the investor withdraws his or her investment income, the amount mandated by the backup withholding tax is remitted to the government, providing the tax-collecting body with the required funds immediately, but leaving the investor with less short-term cash flow.
Explaining 'Backup Withholding'
Investors commonly earn income - for example, interest payments, dividends, capital gains - from assets in which they have invested. While this income is taxable at the time it is received, the taxes owed on any calendar year's worth of investment income only come due once every year, during tax season.
Backup Withholding FAQ
What does it mean to be subject to backup withholding?
Backup withholding requires a payer to withhold tax from payments not otherwise subject to withholding. You may be subject to backup withholding if you fail to provide a correct taxpayer identification number (TIN) when required or if you fail to report interest, dividend, or patronage dividend income.
How do I know if I am not subject to backup withholding?
A U.S. citizen or resident alien will be exempt from backup withholding if the reported name and Social Security Number matches the IRS records. Also, you are exempt if the IRS has not notified you that you are subject to mandatory backup withholding.
How do I stop backup withholding?
To stop backup withholding, you'll need to correct why you became subject in the first place. This can be providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate.
How do I send backup withholding to IRS?
You can file Form 945 with the IRS e-file system, and make backup withholding payments to the IRS electronically with the EFTPS system. You can file Form 945 and make deposits of backup withholding together when using tax preparation software or the services of a tax professional.
Can backup withholding be refunded?
It should be in usually unused withholding box on the 1099 form(s) you receive early in the next tax year. Where the backup withholding was more than your eventual tax bill, you'll be refunded on the overwithheld amount.
How do I fix backup withholding?
To stop backup withholding, you'll need to correct why you became subject in the first place. This can be providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate.
What is the backup withholding rate for 2020?
The rate is 24 percent.
Further Reading
Repeal of the Withholding Tax on Portfolio Debt Interest Paid to Foreigners: Tax and Fiscal Policies in the Context of Eurobond Financing
heinonline.org [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
heinonline.org [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
www.questia.com [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
www.questia.com [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
go.gale.com [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
trace.tennessee.edu [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
link.springer.com [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
onlinelibrary.wiley.com [PDF]
… form); TD 7966, 1984-2 CB 324 (application of information reporting and backup withholding requirements to … of the IFS in a foreign jurisdiction provided a means of avoiding US withholding on interest … company to an IFS were still US-source income, subject to 30% withhold- ing …
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Q&A About Backup Withholding
What does it mean to be subject to backup withholding?
Backup withholding requires a payer to withhold tax from payments not otherwise subject to withholding. You may be subject to backup withholding if you fail to provide a correct taxpayer identification number (TIN) when required or if you fail to report interest, dividend, or patronage dividend income.
How do I know if I am not subject to backup withholding?
A U.S. citizen or resident alien will be exempt from backup withholding if the reported name and Social Security Number matches the IRS records. Also, you are exempt if the IRS has not notified you that you are subject to mandatory backup withholding.
How do I stop backup withholding?
To stop backup withholding, you'll need to correct why you became subject in the first place. This can be providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate.
How do I send backup withholding to IRS?
You can file Form 945 with the IRS e-file system, and make backup withholding payments to the IRS electronically with the EFTPS system. You can file Form 945 and make deposits of backup withholding together when using tax preparation software or the services of a tax professional.
Can backup withholding be refunded?
It should be in usually unused withholding box on the 1099 form(s) you receive early in the next tax year. Where the backup withholding was more than your eventual tax bill, you'll be refunded on the overwithheld amount.
How do I fix backup withholding?
To stop backup withholding, you'll need to correct why you became subject in the first place. This can be providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate.
What is the backup withholding rate for 2020?
The rate is 24 percent.