Backup withholding

If you are a taxpayer receiving certain types of income payments, the IRS requires the payer of these payments to report them on an information return (see types of payments below). The person or business paying you doesn’t generally withhold taxes from these types of payments, as it is assumed you will report and pay taxes on this income when you file your federal income tax return. 

What is backup withholding?

There are situations when the payer is required to withhold at the current rate of 24 percent. This 24 percent tax is taken from any future payments to ensure the IRS receives the tax due on this income.

This is known as Backup Withholding (BWH) and may be required: 

• Under the BWH-B program because you failed to provide a correct taxpayer identification number (TIN) to the payer for reporting on the required information return. A TIN can be either your social security number (SSN), employer identification number (EIN), or individual taxpayer identification number (ITIN); or
• Under the BWH-C program  because you failed to report or underreported interest and dividend income you received on your federal income tax return; or you failed to certify that you're not subject to BWH for underreporting of interest and dividends. 

Payments subject to backup withholding

Backup withholding can apply to most kinds of payments reported on Forms 1099 and W-2G, including:

• Attorney’s fees (Form 1099-NEC) and gross proceeds such as settlements paid to an attorney (Form 1099-MISC)
• Interest payments (Form 1099-INT) 
• Dividends (Form 1099-DIV) 
• Payment Card and Third Party Network Transactions (Form 1099-K) 
• Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR) 
• Rents, profits, or other gains (Form 1099-MISC) 
• Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-NEC) 
• Payments by brokers/barter exchanges (Form 1099-B) 
• Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC) 
• Royalty payments (Form 1099-MISC) 
• Gambling winnings (Form W-2G) may also be subject to backup withholding. 
• Original issue discount reportable on (Form 1099-OID), Original Issue Discount, if the payment is in cash 
• Certain Government Payments, Form 1099-G

Rules for receiving 1099-related payments

When you open a new account, make an investment, or begin to receive payments reportable on Form 1099, you must furnish your TIN in writing to the bank or other business and certify under penalties of perjury that it's correct. In some cases, the bank or business will give you Form W-9, Request for Taxpayer Identification Number and Certification PDF, or a similar form.

If your account or investment will earn interest or dividends, you must also certify that you're not subject to backup withholding due to previous underreporting of interest and dividends.

How to prevent or stop backup withholding

To stop backup withholding, you'll need to correct the reason you became subject to backup withholding. This can include providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate.

Credit for backup withholding

If you had income tax withheld under the backup withholding rule, report the federal income tax withholding (shown on Form 1099 or W-2G) on your return for the year you received the income.

Payments excluded from backup withholding

Payments that are excluded from backup withholding:

• Real estate transactions
• Foreclosures and abandonments
• Cancelled debts
• Distributions from Archer MSAs
• Long term care benefits
• Distributions from any retirement account
• Distributions from an employee stock ownership plan
• Fish purchases for cash
• Unemployment compensation
• State or local income tax refunds 
• Qualified tuition program earnings