If you took on a freelance gig, or opened a financial account that will pay interest, you most likely filled out IRS Form W-9. The form asks for your taxpayer identification number, and includes a certification that you sign stating you're not subject to backup withholding. But do you know what backup withholding is? Here's an overview.
- What is backup withholding? Backup withholding is a way for the IRS to collect federal income tax on certain types of income. While your employer typically withholds federal income tax from your wages, certain other income, such as interest and dividends, patronage dividends, rent, royalties, commissions and fees paid to independent contractors, payments by brokers on stock and bond transactions, and payments from fishing boat operations, generally do not have tax withheld. Backup withholding rules require the payer of those items to withhold federal income tax at the rate of 28% in some circumstances.
- When does backup withholding apply? You might be subject to backup withholding if you fail to provide your social security number or taxpayer identification number to a company or individual who is paying you income that is subject to the tax. Backup withholding may also apply if you provide an incorrect identification number, or if you fail to sign the certification portion of Form W-9.
- Can you get a refund of backup withholding? If backup withholding was withheld by mistake from income you received and you act quickly to correct your records with the payer, you may be able to get a refund directly from the payer. Otherwise, you can claim the amount withheld on your individual income tax return along with other federal income tax withholding.
The best way to avoid backup withholding is to provide the correct information up front. Contact us if you have questions about the backup withholding rules and how they apply to you.
