What is backup withholding?

What is backup withholding?

Under certain circumstances an entity making payments in the normal course of business to a United States individual or an entity will be required to withhold 24% of the payment and remit it to the IRS. This is called “backup withholding”.  The main trigger for backup withholding is when the person or entity receiving the payment does not provide their TIN number to the paying entity.   Form W-9 is typically used to provide the TIN number to the paying entity.  The paying entity is required to include the TIN number to the IRS on any payment reporting on a Form 1099 at the end of the year.

Payments that may be subject to backup withholding include interest, tax-exempt interest, dividends, broker and barter exchange transactions.  Rents, royalties, nonemployee pay, payments made in settlement of payment card and third-party network transactions, and certain payments from fishing boat operators may also be subject. Real estate transactions are not subject to backup withholding.

Backup withholding

Payments you receive will be subject to backup withholding if:

1. A TIN is not provided to the requester,

2. The TIN is not certified (signed) when required (see the Part II of the W-9 instructions, page 3 for details),

3. The IRS tells the requester that an incorrect TIN was furnished.

4. The IRS tells the entity or individual receiving the payment that they are subject to backup withholding because they did not report all their interest and dividends on their tax return (for reportable interest and dividends only), or

5. The entity or individual does not certify to the requester that they are not subject to backup withholding under 4 above (for reportable interest and dividend accounts opened after 1983 only).

Exempt payees

Certain payees and payments are exempt from backup withholding. See Exempt payee code on page 3 of Form W-9 and the separate  Instructions for the Requester of Form W-9 for more information.

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