What is Backup Withholding and What Are The Rules?

Calculator on top of 100 dollar bills with the text tax deduction, representing back up withholding.
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Backup withholding is withholding that is taken from certain forms of payments and income by businesses and banks. If you are paying individuals and reporting those payments on Form 1099, you may be required to withhold taxes from some of these individuals, as backup withholding.

Payments That Are Subject to Backup Withholding

Payments that may be subject to backup withholding include: 

  • Interest payments (​Form 1099-INT)
  • Dividends (Form 1099-DIV)
  • Rents, profits, or other income (​Form 1099-MISC)
  • Commissions, fees, or other payments for work performed as an independent contractor (​Form 1099-MISC)
  • Payments by brokers and barter exchange transactions (​Form 1099-B)
  • Payment Card and Third-Party Network Transactions (​Form 1099-K)
  • Royalty payments (​Form 1099-MISC)

Withholding Income Taxes on a Payment

You as a business owner and payer must withhold taxes on a payment if:

  • The taxpayer has not given you a taxpayer identification number (Social Security Number, Employer ID Number, or Individual Taxpayer ID Number)
  • The IRS has notified you that the taxpayer ID number is incorrect
  • The IRS has notified you that the taxpayer has not reported all interest or dividend income in prior years

Individual's Taxpayer ID

Use Form W-9 to request the identification number of the individual. If you do not receive the information, start backup withholding immediately and continue until you receive it. 

How Much to Withhold

The backup withholding rate is currently 24% of the total amount paid to the worker, effective for the 2018 tax year and beyond.

Filing Form 945

First, you must file Form 945 with the IRS. Form 945 is an annual report form, used for reporting all backup withholding for all payees for the year. You can e-file this form or send it by mail. If you send by mail, where you send the form depends on whether you are making a payment.

Reporting Backup Withholding to the Payee

For individual payees, you must provide them with information on the amounts withheld from each check. Then at the end of the year, you must report the total backup withholding, along with the total amount paid for the year, on Form 1099-MISC. 

Depositing the Backup Withholding Amounts

Generally, the deposit rules for Form 945 are the same as those for Form 941 (payroll taxes). You are a semiweekly or monthly depositor, depending on the amount deposited. You may use the IRS e-file (EFTPS) system or make deposits using the deposit coupon. There are some special rules that relate to depositing backup withholding; read the Instructions for Form 945 for more information.