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Finance

What is Backup Withholding?

By Garry Crystal
Updated Jan 22, 2024
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In the US, when one person or entity makes payments to another — such as a company making wage payments to an employee — it must withhold and then pay a specified percentage of this payment to the Internal Revenue Service (IRS). This is called backup withholding. These payments have conditions set by the IRS, and there are many variables regarding what type of payments this type of withholding can apply to.

Backup withholding payments apply to most payments that are reported on an IRS Form 1099. These can include interest and payments by brokers, as well as royalties. Others include dividends, patronage dividends if at least half the payment is in money, rents, and profits. Commissions, fees, or payments for work undertaken as an independent contractor may also be liable.

There are certain cases for which backup withholding payments can be excluded. These include real estate transactions, abandonments, foreclosures of properties, and canceled debts. Other exceptions are care benefits, fish purchases for cash, unemployment compensation, state or local income tax refunds, and distributions from an employee stock ownership plan (ESOP).

A payment must be a reportable interest or dividend payment, if that dividend is paid in money or qualified check, in order to be subject to backup withholding, as set out in section 6049(a), 6042(a), or 6044. Any other reportable payment, as set out in section 6041, 6041(a), 6045, 6050A, or 6050N, will also be subject to it.

Reportable payments include the payee failing to supply his or her taxpayer identification number (TIN). If the payee has supplies an incorrect TIN, then this withholding also applies. When payments for interest and dividend accounts or interest, dividend, and broker exchange accounts have been acquired after 1983 and the payee has failed to supply a correct TIN, this withholding applies as well.

A payer may receive a CP2100 or CP2100A, which is a notice informing the payer that he or she may be responsible for backup withholding. It will be accompanied by a list of incorrect, missing, or not received payee TINs. Large volume filers receive a CP2100, while all other filers receive the CP2100A notice. The backup withholding rate (BWH Rate) was 28.0% for payments after 31 December 2002 through 31 December 2012. Payments made after 31 December 2012 are subject to a 31% BWH but it may be liable to change again.

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Discussion Comments

By anon100917 — On Aug 01, 2010

"Reportable payments subject to backup withholding include the payee failing to supply his or her taxpayer identification number (TIN)."

False.

Under Internal Revenue Code (IRC) 6109(a)(3) requires withholding agents to request social security numbers (SSN's) from payees:

"Any person required under the authority of this title to make a return, statement, or other document with respect to another person shall request from such other person, and shall include in any such return, statements, or other document, such identifying number as may be prescribed for securing proper identification of such other person."

The implementing regulation for IRC 6109(a)(3) is 26 CFR 301.6109-1(c), which states that if a withholding agent requests a payee's SSN but does not receive it, all the withholding agent has to do to comply with the law is sign an affidavit stating that the request was made. In other words, withholding agents are required to request, and not obtain, SSN's from payees:

"Every person required under this title to file a return, statement, or other document shall furnish such taxpayer identifying numbers of other persons as required by the forms and the instructions relating thereto. If he does not know the taxpayer identifying number of the other person, he shall request such number of the other person. A request should state that the identifying number is required to be furnished under authority of law. When the person filing the return, statement, or other document does not know the number of the other person, and has complied with the request provision of this paragraph, he shall sign an affidavit on the transmittal document forwarding such returns, statements, or other documents to the Internal Revenue Service, so stating."

Furthermore, IRC 6723 governs failures to report information under IRC 6109. IRC 6724(a) provides for a waiver of any penalties assessed under the code upon a showing of reasonable cause:

"No penalty shall be imposed under this part with respect to any failure if it is shown that such failure is due to reasonable cause and not willful neglect." Thus, if a withholding agent requests an SSN from a payee and signs an affidavit stating that a request was made, it is under no possibility of penalty.

By anon74727 — On Apr 03, 2010

My husband is the sole proprietor of a trucking business.He only has one truck and he hauls gravel for driveways and patches oilfield roads. He uses his ss number as his tax ID. Recently a company asked if he was subject to backup withholding. He receives 1099 forms from people he does work for. So, does that mean he subject to backup withholding?

By anon36836 — On Jul 15, 2009

If I trade forex on an online platform will the back-up only be calculated on the money deposited into my bank account or on the daily profits and losses?

By anon33656 — On Jun 09, 2009

If I am an employee and I provide an invalid SSN to my employer, can my employer perform backup withholding and report that on my Form W-2?

By pattifrench — On Sep 05, 2007

After leaving my company I requested my money from my ESOP account. It has been several years. Why is it taking them so long and what is the amount of time allowable by law for the company to release your money?

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