TOP DRAWER ARTICLE
Backup Withholding
by
HL Carpenter
If you’ve ever completed Form W-9, Request for Taxpayer Identification Number and Certification, you’ve heard of backup withholding. But you may be unsure what backup withholding is, and how it can impact you.
Here’s an overview:
Backup withholding is a tax term for mandatory tax withholding from some types of income, such as dividends, interest, investment proceeds and gambling winnings. It became law in 1984, as part of the Interest and Dividend Tax Compliance Act of 1983.
Under the law, companies or individuals who make certain payments to you are required to file annual information returns with the Internal Revenue Service. Along with the total amount of the payments made to you during the year, the information returns must contain your Taxpayer Identification Number (TIN), which payers request from you using Form W-9. (Your TIN is generally your social security number.)
If you fail to provide your TIN, or provide an incorrect one, the IRS can’t track the payments to make sure the income is reported correctly.
When that happens, the IRS sends the payer a letter asking for an explanation. If the discrepancy isn’t corrected within thirty days, the payer is required to withhold tax – called backup withholding - from your payments. In effect, you are forced to pay tax in advance on the income you receive.
The backup withholding rate is set by statute to equal the fourth lowest tax rate applied to single taxpayers. That rate is currently 28 percent, meaning payers will deduct 28 percent of any amount paid to you and remit it to the IRS on your behalf.
Note: The backup withholding is refundable, so you can claim it as a payment on your tax return, just like the amount withheld from your wages.
In many cases you can avoid having backup withholding taken out of your payments by providing your correct TIN to your payer. However, if you underreported income or did not file a tax return at all, you’ll need to get current with the IRS before the backup withholding can be stopped.
Originally published January 2008.
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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly financial and tax topics for individuals and small businesses, and publishes Top Drawer Ink, a newsletter that's chock full of humor and common sense information.
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This information should not be considered legal, investment or tax advice. Top Drawer
Ink Corp. does not provide legal, investment or tax advice. Always
consult your legal, investment and/or tax advisor regarding your
personal situation. |
Last update: December 30, 2009
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