What is Backup Withholding and What Are The Rules?
How Employers Must Comply with Backup Withholding Rules
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.
What Payments Are Subject to Backup Withholding?
Payments that may be subject to backup withholding include:
- Interest payments (Form 1099-INT)
- Dividends (Form 1099-DIV (PDF));
- Rents, profits, or other income (Form 1099-MISC (PDF));
- Commissions, fees, or other payments for work performed as an independent contractor (Form 1099-MISC (PDF));
- Payments by brokers and barter exchange transactions (Form 1099-B (PDF));
- Payment Card and Third-Party Network Transactions (Form 1099-K (PDF)); and
- Royalty payments (Form 1099-MISC (PDF)).
For most businesses, payments to independent contractors and freelancers are most likely to require backup withholding. For more information, read this article about who must receive a 1099-MISC form.
When Must I Withhold 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
(There are several other circumstances that apply to banks and brokerages but not to businesses.)
How Do I Get the 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 Do I Know 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.
How and When Do I File 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. See the IRS article on Instructions for Form 945 for a complete list of payment addresses.
How Do I Report 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.
How Do I Deposit 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.