It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
B is for Backup Withholding.
Though it may not feel like it at tax time, our tax system is effectively “Pay As You Go.” On payday, if you earn wages, you fulfill part (or in some cases, all) of your tax obligations by handing over a portion of your check to the Internal Revenue Service (IRS) through federal income tax withholding: that’s the amount that your employer takes out on your behalf and pays over to the IRS. At tax time, you add up what you paid into the system and you must pay any additional, be refunded any excess or, on occasion, end up exactly even.
That doesn’t always happen with other sources of income. The self-employed have to manage on their own (through estimated payments), as do taxpayers who receive unearned income, like dividends and interest. In those cases, the payer issues a form 1099 to you – the kind of form depends on the nature of the payment – and you self-report to IRS, paying any tax that might be due.
(For more on the various kinds of tax forms, click here.)
However, there are circumstances in which the IRS insists that the payer withhold a portion of your payment and instead, remit that amount to the IRS. That withholding, which is a flat 28% of the amount to be paid, is called “backup withholding.” Backup withholding is required when:
- You don’t provide your Taxpayer Identification Number (or “TIN,” generally, your EIN, SSN or ITIN) when required;
- You provided the wrong TIN (or the IRS says that you did); or
- You are required, but fail, to certify that you are not subject to backup withholding.
You typically provide your TIN to the payer on a form W-9; you’ll also certify that you are not subject to backup withholding on the same form (that’s the bit in the circle below that you agree to under penalty of perjury).
There are civil and criminal penalties for giving false information to avoid backup withholding. The civil penalty is $500. The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both.
