Candace J. Dixon
Banks or other businesses that make certain types of payments to you must file an information return with the IRS on Form 1099 showing payments that you received during the year. A Form 1099 includes your name and TIN such as a social security number (SSN), employer identification number (EIN), or individual taxpayer identification number (ITIN). The Form 1099 will also report any amounts withheld under the backup withholding rules.
Taxpayers who receive this type of income may have backup withholding deducted from their payments, and there are situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income. Backup withholding requires a payer to withhold federal tax from payments not otherwise subject to withholding.
Withholding rules
When you open a new account, make an investment, or begin to receive payments reportable on Form 1099, you must provide your TIN. For certain types of payments, you must provide the TIN in writing and certify under penalties of perjury that it's correct. In those cases, the bank or business will give you Form W-9, Request for Taxpayer Identification Number and Certification 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.
You may be subject to backup withholding if you fail to provide a correct taxpayer identification number (TIN) when required or if you fail to report interest, dividend, or patronage dividend income.
Payments subject to backup withholding
Backup withholding can apply to most kinds of payments reported on Form 1099, including:
Interest payments (Form 1099-INT);
Government payments (Form1099-G);
Dividends (Form 1099-DIV);
Patronage dividends if at least half of the payment is in money (Form 1099-PATR);
Rents, profits, or other gains (Form 1099-MISC);
Commissions, fees, or other payments for work performed as an independent contractor (Form 1099-NEC);
Payments by brokers and barter exchange transactions (Form 1099-B);
Payments by fishing boat operators, only the part that's in money and that represents a share of the proceeds of the catch (Form 1099-MISC);
Payment Card and Third-Party Network Transactions (Form 1099-K)
Royalty payments (Form 1099-MISC).
Taxable grants
Agriculture payments
Backup withholding also may apply to gambling winnings (Form W-2G) that aren't subject to regular gambling withholding.
Credit for backup withholding
If your 1099 shows an amount withheld under the backup withholding rules, report the amount as federal income tax withheld on your income tax return for the year you received the income.
If you operate as a partnership or subchapter S corporation, any backup withholding can only be claimed by the partners and shareholders. Partners and shareholders should report their respective shares of the withheld amounts on their individual income tax returns. The amounts aren't refundable to the partnership or subchapter S corporation.
You may be subject to backup withholding at a flat 24% rate when:
You don't give the payer your TIN in the required manner.
The IRS notifies the payer that the TIN you gave is incorrect.
The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.
You fail to certify that you're not subject to backup withholding for underreporting of interest and dividends.
How to prevent or stop backup withholding:
Payees should make sure that payers have their correct names and TINs (Social Security numbers, Employer Identification Numbers, Individual Taxpayer Identification Numbers) to prevent backup withholding.
To stop backup withholding, you need to correct the reason you became subject to it. This may be providing the correct name or TIN to the payer – certifying that the TIN is correct; resolving underreported income or paying amounts owed, or filing missing returns.
If you receive a notice from a payer notifying you that the TIN you gave is incorrect, you can usually prevent or stop backup withholding by giving them your correct name and TIN; certifying that the TIN you provide is correct.
Resources: Backup Withholding - IRS page
Backup Withholding "B" Program - IRS page Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs