Definition: Backup withholding is a type of withholding for federal income taxes on certain types of income. Backup withholding may be mandatory in certain circumstances. Most taxpayers, however, are exempt from backup withholding.
What is Backup Withholding?
Income tax may be withheld at a flat rate of 28% on the following types of income:
- Interest,
- Dividends,
- Patronage dividends,
- Rents
- Royalties,
- Commissions and fees paid to independent contractors,
- Payments from brokers on stock and bond transactions,
- Payments from fishing boat operators.
Who's Exempt from Backup Withholding?
US citizens and resident aliens will be exempt from backup withholding if:
- You properly report your name and Social Security number to the payer using Form W-9, and that information matches the IRS records,
- You have not been notified by the IRS that you are subject to mandatory backup withholding.
When does the IRS require Backup Withholding?
The IRS requires backup withholding if your name and Social Security number on Form W-9 does not match their records. They often require backup withholding if you owe federal income taxes, or if you have not reported all your interest, dividends and other income on your tax returns.
The IRS will notify you if you are required to have backup withholding. They will also notify any payers if your name and Social Security do not match the IRS records.
