Have you recently been asked to take out backup withholding from someone’s payment and have no idea what that is? We’ve got you covered – this blog post will give an explanation of what it is and what forms of payments to which it applies.
What Is Backup Withholding?
Unlike regular withholding where you withhold the federal income tax from employees’ paychecks, backup withholding typically covers the tax you must withhold from a non-employee’s payments.
In the event the Taxpayer Identification Number (TIN) or the vendor name/TIN combination doesn’t match federal records, the IRS will ask you to take out a certain percentage of that payment in what’s called backup withholding to ensure that they will pay the taxes owed.
As of 2019, the backup withholding percentage is 24%.
Types of Payment To Which Backup Withholding Applies
The IRS has included a comprehensive list of the types of payment to which backup withholding applies, including:
- Interest payments;
- Dividends;
- Transactions done through a third-party network or card;
- Patronage dividends, provided at least half the payment is in cash;
- Profits, rents, or other incomes;
- Independent contractor fees, commissions, and other payments;
- Broker payments;
- Barter exchanges;
- Fishing boat operator payments, but only that which is paid in cash and is a share of the catch’s proceeds;
- Royalties; and
- Gambling winnings.
Have any questions on backup withholding or want further details? Check out the IRS’s resource library on the subject here.
