Why Am I Withholding?
Author: Keith Huggett
It's January and you're beginning to fill out your 1099-Misc forms, but you can't read the Tax ID number that your Independent Contractor wrote down for you. You know it's either a 5 or a 3 so you make your best guess. Unfortunately, it's going to come back to haunt you, and your contractor, in the form of backup withholding.
Backup withholding is withholding for federal income taxes on specific types of income and may be mandatory in certain circumstances. Withholding is applied to the following types of income at a rate of 28%:
- Interest
- Dividends
- Patronage Dividends
- Rents
- Royalties
- Commissions & fees paid to independent contractors
- Payments from brokers & bond transactions
- Payments from fishing boat operators
Most taxpayers are exempt from backup withholding. You are exempt from withholding if you report your name and social security number to your payer on a Form W-9, and have not been notified by the IRS that you are subject to withholding. It is very important that this information matches what the IRS has on record for you.
If the IRS receives 1099 information with an error on it, where the information given does not match the information that they have, backup withholding will be required. In the introductory example, you, the payer, would be required to initiate backup withholding for the independent contractor, as the tax identification number did not match the IRS record. You the payer, as well as the independent contractor would be notified by the IRS of the withholding requirement.
To help make certain you get the correct tax information from your Independent Contractors, it is always best to ask for a complete W-9 when you initiate business. You will get contact information, tax identification, and confirmation of withholding status. For a more in depth look at Form 1099-misc and Form W-9, please take a look at our complimentary white paper, Form 1099-Misc, The Good, The Bad, and The Ugly!
Should you have any questions, the Tax Specialists at the Tax Office, Inc. are available to discuss your situation. Contact us for help with any and all tax forms you receive from the IRS.
