IRS Tax Reform Tax Tip 2018-168, October 30, 2018
The IRS urges taxpayers who make payments or receive payments to check out Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s). The newly revised publication helps taxpayers understand how tax reform affects backup withholding. Backup withholding can apply to most kinds of payments reported on Form 1099.
Last year’s Tax Cuts and Jobs Act dropped the backup withholding tax rate from 28 percent to 24 percent.
This affects taxpayers who make and receive payments. Taxpayers who make payments are known as “payers,” while those who receive payments are known as “payees.”
Backup withholding can apply to payments such as:
- Interest payments
- Patronage dividends, but only if at least half of the payment is in money
- Rents, profits or other income
- Commissions, fees or other payments for work performed as an independent contractor
- Payments by brokers and barter exchange transactions
- Certain portions of payments by fishing boat operators
- Payment card and third-party network transactions
- Royalty payments
- Gambling winnings that aren't subject to regular gambling withholding
- Taxable grants and agriculture payments
Here are some situations when a payee may be subject to backup withholding. They:
- Fail to give a taxpayer identification number to the payer
- Give an incorrect TIN
- Supply a TIN in an improper manner
- Underreport interest or dividends on their income tax return
- Fail to certify that they’re not subject to backup withholding for underreporting of interest and dividends
- To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the underreported income and pay the amount owed, or file a missing return.
A TIN can be a:
- Social Security number
- Employer identification number
- Individual taxpayer identification number
- Adoption taxpayer identification number
The newly revised Publication 1281 is packed with useful information. It will help any payer who is required to impose backup withholding on any of their payees.