Backup Withholding “B” Processes
What is Backup Withholding?
Under the provisions of Internal Revenue Code, Section 3406(b), persons (payers) making certain payments to payees must withhold and pay to the IRS a specified percentage (see BWH Rate Table) of those payments under certain conditions.
Which payments may be subject to backup withholding?
Backup withholding can apply to most kinds of payments that are reported on Form 1099. These include:
- Interest payments (Form 1099-INT),
- Dividends (Form 1099-DIV),
- Payment Card and Third Party Network Transactions (Form 1099-K),
- Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR),
- Rents, profits, or other gains (Form 1099-MISC),
- Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-MISC),
- Payments by brokers/barter exchanges (Form 1099-B),
- Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC), and
- Royalty payments (Form 1099-MISC).
- Gambling winnings (Form W-2G) may also be subject to backup withholding.
- Original issue discount reportable on (Form 1099-OID), Original Issue Discount, if the payment is in cash.
- Form 1099-G payments that are subject to backup withholding under IRC 6041 and 3406(b)(3)(A) which include taxable grants and agricultural payments (1099-G Box 6 or 7).
Payments that are excluded from backup withholding are real estate transactions, foreclosures and abandonments, cancelled debts, distributions from Archer MSAs, long term care benefits, distributions from any retirement account, distributions from an employee stock ownership plan (ESOP), fish purchases for cash, unemployment compensation, state or local income tax refunds, and qualified tuition program earnings.
Backup Withholding (BWH Rate Table)
28.0% on payments after December 31, 2002.
When is Backup Withholding Required?
To be subject to backup withholding, a payment must be a reportable interest or dividend payment under section 6049(a), 6042(a), or 6044 (if the patronage dividend is paid in money or qualified check), or an "other" reportable payment under section 6041, 6041A(a), 6045, 6050A, 6050N, or 6050W. If the payment is one of these reportable payments, backup withholding will apply if:
- The payee fails to furnish his or her taxpayer identification number (TIN) to you,
- For interest, dividend, and broker and barter exchange accounts opened or instruments acquired after 1983, the payee fails to certify, under penalties of perjury, that the TIN provided is correct,
- The IRS notifies you to impose backup withholding because the payee furnished an incorrect TIN (CP2100 or CP2100A).
- For interest and dividend accounts or instruments, you are notified that the payee is subject to backup withholding (under section 3406(a)(1)(C), "C" notice), or
- For interest and dividend accounts opened or instruments acquired after 1983, the payee fails to certify to you, under penalties of perjury, that he or she is not subject to backup withholding. Some payees are exempt from backup withholding. For a list of exempt payees and other information, see Form W-9, Request for Taxpayer Identification Number and Certification, and the separate Instructions for the Requester of Form W-9.
What is a CP2100 or CP2100A Notice?
It is a notice which tells a payer that he or she may be responsible for backup withholding. It is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs. Large volume filers receive a CP2100 all other filers will receive a CP2100A.
Large Filer: 250 or more error documents
Mid Size Filer: Less than 250 error documents and greater than 50 error documents
Small Filer: Less than 50 error documents
What to do if you receive a CP2100 or CP2100A Notice.
- Compare the listing(s) with your records.
- For missing TINs: Determine if you are already backup withholding on the account. If you are not, begin backup withholding immediately. You must make up to three solicitations for the TIN (initial, first annual, second annual) to avoid a penalty for failing to include a TIN on the Information Return.
- For incorrect TINs: Compare the accounts on the listing with your business records. If they agree, send the appropriate "B" Notice to the payee. If an account does not agree, this could be the result of a recent update, an error in the information you submitted, or an IRS processing error. If this is what happened, the only thing you should do is correct or update your records.
REMINDER: YOU DO NOT HAVE TO CALL OR WRITE TO THE IRS TO SAY THAT YOU MADE THE CORRECTION OR UPDATE.
Frequently Asked Questions about Backup Withholding
WHERE TO CALL FOR HELP
If you have any questions about backup withholding, information reporting, Forms 1099, or the CP2100 or CP2100A Notices and listing(s), you may call:
The Information Reporting Program Customer Service Section (call site)
Toll-Free Telephone: (866) 455-7438
Hours: 8:30 a.m. to 4:30 p.m. Monday through Friday EST
Publication 1281, "Backup Withholding for Missing and Incorrect Name/TIN(s)," provides additional information and copies of the First and Second annual solicitation notices for your use.