Under U.S. federal tax rules, backup withholding may apply to certain reportable payments if the income recipient fails to provide a valid Taxpayer Identification Number (TIN) or the IRS notifies the payor it must withhold tax on payments to the income recipient.
The backup withholding rules are in IRC Section 3406. The IRS provides more guidance in IRS Publications 1281 and 1335.
For all payments made after December 31, 2017, the backup withholding rate is 24% of the gross payment amount. Congress may amend this tax rate in the future.
Reasons for Backup Withholding
- Failure to Furnish a TIN. If the income recipient fails to provide a TIN to the payor, the payor backup withholds the payments immediately.
- Backup Withholding “B” Program. If the income recipient provides the payor with an invalid TIN, and the payor uses the invalid TIN on Form 1099 reporting, the IRS will send a CP2000A notice to the payor stating that the payee TIN was invalid and backup withholding is now required.
- Backup Withholding “C” Program. If the income recipient does not accurately and timely report the income on his tax return, the IRS will notify the payor that backup withholding is now required on future payments.
Reportable payments that are subject to backup withholding include, but are not limited to, the following:
- Interest Income (Form 1099-INT)
- Dividend Income (Form 1099-DIV)
- Payment Card Transactions (Form 1099-K)
- Compensation (Form 1099-NEC)
- Payments by Brokers (Form 1099-B)
- Royalties (Form 1099-MISC)
Credit for Backup Withholding
The backup withholding tax is federal income tax withholding. A taxpayer can claim the backup withholding amount on their Form 1040 tax return, similar to how a taxpayer claims the federal income tax withheld on their wages, as reported in Box 2 of Form W-2 (Wage and Tax Statement).
Please see our instructional video for an example of backup federal withholding on Form 1099-INT.