Backup Withholding

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Banks and other businesses that pay you certain kinds of income must file Form 1099, an information return, with the IRS. Generally, these payments are not subject to withholding; however they may be subject to backup withholding. Payments that may be subject to "backup withholding" include interest, dividends, rents, royalties, payments for work you do as an independent contractor, and broker payments. Under the backup withholding rules, the business or bank must withhold on a payment if:
  1. You have not given the payer your taxpayer identification number in the required manner,
  2. The IRS has notified the payer that the taxpayer identification number you provided is incorrect.
  3. The IRS has notified the payer to start withholding on interest and dividends because you had not reported all of your interest or dividend income in prior years; or
  4. You have not certified, when required, that you were not subject to backup withholding on interest and dividends.

The backup withholding rate is 28.0% of Payments after December 31, 2002 until sunset December 31, 2010. To Be Determined, thereafter.

Payers who withhold income tax under the backup withholding rules must show the tax withheld on a Form 1099. The payer must send you this form by end of January following the year for which the taxes have been withheld. If you have not received it by then, contact the bank or business that made payments to you. You should report the amount of tax withheld in the payment section on your Form 1040, 1040A or 1040EZ. More detailed information on the backup withholding rules and procedures for payers can be found in Publications 1679 and 1281.

Backup withholding is permissable if both the payer and payee agree to the withholding. It is sometimes advantageous to do this.

For more information, refer to Publication 505, Tax Withholding and Estimated Tax.

Source: IRS.gov

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