What to Do With an IRS Backup Withholding Notice
If your business has workers in your business who are not employees, you might have received a notice from the IRS about backup withholding. This article explains backup withholding, why you received this backup withholding notice, and what to do now.
What is Backup Withholding?
Backup withholding is income tax withholding required for non-employees (including independent contractors) and other transactions. You know that you don't have to withhold income taxes from payments you make to non-employees (independent contractors, freelancers, or other service businesses that do work for your company). But you are required to have a W-9 form signed by each of these workers or companies. The W-9 form (it's like a W-4 form for employees) includes information on the person's name and address, and most important, the taxpayer ID number of this person.
Stated differently, employers must withhold income taxes from non-employees if the non-employee's taxpayer ID number is missing or cannot be verified.
What Is a "B" Notice? What Must I Do If I Receive This Notice?
A "B" notice is a backup withholding notice from the IRS stating that the non-employee's taxpayer ID number is either missing or incorrect. When you receive the first IRS notice, you must:
First, send a copy of the "B" notice to the individual and ask them to sign a new W-9 form.
If the IRS says the taxpayer ID is missing, immediately start withholding taxes at the rate of 24% from that non-employee's pay, no later than 30 days after you receive the notice.
If you receive a new W-9 form from the person, and you have an old W-9 form with that person's taxpayer ID, check to make sure that you have a new taxpayer ID. You can stop backup withholding if you receive a new W-9 form from the individual.
If you cannot find the taxpayer, the taxpayer refuses to complete Form W-9, or the person doesn't respond, you must immediately start backup withholding (24% tax rate, effective 2018 and beyond) from the payments made to that person.
What is a Second "B" Notice? What Must I Do With This Notice?
The second B notice tells the individual taxpayer to contact the IRS or Social Security Administration to obtain a correct Taxpayer ID Number. You as the employer are not required to do anything except continue to withhold income tax from the taxpayer's payments until you receive a new W-9 form from the individual.
What Is a "C" Notice? What Must I Do When I Receive This Notice?
A "C" notice is a backup withholding notice from the IRS stating that the non-employee has understated income and is subject to backup withholding. When you receive the first "C" notice, you must:
- Immediately start withholding taxes at the rate of 24% (effective 2018 and beyond) from that non-employee's pay, no later than 30 days after you receive the notice
- Send or give a copy of the "C" notice to the individual.
If you receive a "B" notice or "C" notice, you must continue withholding until you are informed by the IRS to stop withholding.
When in doubt as to what to do, always start backup withholding on payment made to an individual (at the current rate of 24%). Let the taxpayer sort out the taxpayer ID problem with the IRS.
Reporting and Paying Backup Withholding to the IRS
When you withhold backup withholding from a person's income, you're not done with the IRS. You must pay these withheld taxes to the IRS, report on the payments you have made, and include the information on backup withholding on the person's 1099-MISC.
Making Backup Withholding Payments
Backup withholding payments are not made through the same process as for employee income. Make payments separately, using electronic funds transfer (EFT).
- If the total amount for all backup withholding payments is less than $2,500 for the year, you may make payments along with the annual report form (IRS Form 945) (see below).
- If the total is more than $2,500, use either the semi-weekly or the monthly schedule. But remember not to include these payments with those for an employee to determine which schedule to use.
See Chapter 11, IRS Publication 15, for more details.
Reporting Backup Withholding Payments
You must report payments you collected for backup withholding, on Form 945, Annual Return of Withheld Federal Income Tax. Form 945 is due by January 31 of the year after the tax year. So, for 2018 backup withholding, you must file Form 945 with the IRS by January 31, 2019.
See the Instructions for Form 945 for more information.
Reporting Annual Backup Withholding Payments to Independent Contractors
Be sure you include the total backup withholding payments for each contract worker on their Form 1099-MISC for the year. Give it to the person and file it with the IRS by January 31 of the following year.