James D. Lynch
What is backup withholding?
Businesses who pay nonemployee compensation of $600 or more for the year must report these payments to the IRS using Form 1099-NEC, Nonemployee Compensation. The business generally does not withhold taxes from such payments. However, there are situations when the business is required to withhold a certain percentage of tax from these payments in order to ensure the IRS receives the tax due. The business's requirement to withhold taxes from payments not otherwise subject to withholding is known as backup withholding.
For example, nonemployee compensation may be subject to backup withholding if a payee has not provided a Taxpayer Identification Number (TIN) to the payer or the IRS notifies the payer that the payee provided a TIN that does not match their name in IRS records. Backup withholding can also apply to other types of payments reported on Forms 1099 (e.g. 1099-INT, 1099-DIV, etc.) as well as Form W-2G (gambling winnings).
The current backup withholding tax rate is 24%. The business withholds this 24 percent tax from the payee’s compensation, and the business must file Form 945 annually to report all backup withholding for all payees for the year. Generally, the tax deposit rules for Form 945 are the same as those for Form 941 (payroll taxes).
A payee can stop backup withholding by correcting the reason for becoming subject to backup withholding. This can include providing the correct TIN to the payer, resolving the underreported income, paying the tax owed, or filing the missing return(s), as appropriate.