When is backup withholding required?

  • You make reportable payments to persons (or corporations) who have not furnished their valid TIN.
  • The IRS notifies you to impose backup withholding.
  • In certain cases, with interest, dividend and broker and barter exchange accounts when the payee does not certify the TIN is correct or that they are not subject to withholding. The withholding rate is 24%. For most companies, if you receive a completed and signed W-9 backup withholding will not apply.

What is the best way to avoid backup withholding on my vendors?

In most cases once you receive a properly completed and signed W-9 form from your vendor no withholding is required. The few exceptions to this include when:

  • the IRS has notified you that a vendor is subject to withholding or has furnished an incorrect TIN.
  • a vendor with an interest, dividend broker or barter exchange account with you crosses out #2 in the certification section or doesn’t sign the W-9.

What is backup withholding?

Persons (payers) making certain payments to payees must withhold and pay to the IRS a specified percentage of those payments under certain conditions. Payments that may be subject to backup withholding include interest, dividends, rents, royalties, commissions, non-employee compensation, and other payments including broker proceeds and barter exchange transactions, reportable gross proceeds paid to attorneys, and certain payments made by fishing boat operators. Payments that are excluded from backup withholding are real estate transactions, foreclosures and abandonments, cancelled debts, distributions from Archer Medical Savings Accounts (MSAs), long-term care benefits, distributions from any retirement account, distributions from an employee stock ownership plan (ESOP), fish purchases for cash, unemployment compensation, state or local income tax refunds, and qualified tuition program earnings.

For additional information see Publication 1281, Backup Withholding.

What payments are subject to backup withholding?

The IRS lists the following payments subject to backup withholding.

  1. Rents and commissions, non-employee compensation for services, royalties, reportable gross proceeds paid to attorneys and other fixed or determinable gains, profits, or income payments reportable on Form 1099-MISC, Miscellaneous Income.
  2. Interest reportable on Form 1099-INT, Interest Income.
  3. Dividends reportable on Form 1099-DIV, Dividends and Distributions.
  4. Patronage dividends paid in money or qualified check reportable on Form 1099-PATR, Taxable Distributions Received From Cooperatives.
  5. Original issue discount reportable on Form 1099-OID, Original Issue Discount, if the payment is in cash.
  6. Gross proceeds reportable on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions.
  7. Gambling winnings reportable on Form W-2G, Certain Gambling Winnings, unless subject to regular gambling withholding. If not subject to regular gambling withholding, backup withholding only applies if, and only if, the payee does not furnish a taxpayer identification number to the payor.
  8. Gross payments reportable on Form 1099-K, Payment Card and Third-Party Network Transactions.
  9. Form 1099-G payments that are subject to backup withholding under IRC 6041 and 3406(b)(3)(A) which include taxable grants and agricultural payments (1099-G Box 6 or 7)

Also note that you must start backup withholding if:

  1. Your vendor crosses out section 2 in the W-9s certification section
  2. The W-9 is not certified (signed) when required
  3. Your vendor does not respond with the correct documentation to a second “B” notice
  4. You receive a “C” notice from the IRS.

For additional information see Publication 1281, Backup Withholding.