Topic 307 - Backup Withholding

Banks or other businesses that pay you certain kinds of income must file an information return Form 1099 with the IRS. The information return shows payments that you received during the year. It also includes your name and taxpayer identification number (TIN). Your TIN is your social security number (SSN), your employer identification number (EIN), or your individual taxpayer identification number (ITIN).

These payments generally are not subject to withholding. Backup withholding, however, is required in certain situations.

Payments subject to backup withholding: Backup withholding can apply to most kinds of payments reported on Form 1099. These include:

  • Interest payments ( Form 1099-INT (PDF));
  • Dividends ( Form 1099-DIV (PDF));
  • Patronage dividends, but only if at least half of the payment is in cash ( Form 1099-PATR (PDF));
  • Rents, profits, or other income ( Form 1099-MISC (PDF));
  • Commissions, fees, or other payments for work performed as an independent contractor ( Form 1099-MISC (PDF));
  • Payments by brokers and barter exchange transactions ( Form 1099-B (PDF));
  • Payments by fishing boat operators, but only the part that is in cash and that represents a share of the proceeds of the catch ( Form 1099-MISC (PDF));
  • Payment Card and Third-Party Network Transactions ( Form 1099-K (PDF)); and
  • Royalty payments ( Form 1099-MISC (PDF)).

Backup withholding also may apply to gambling winnings ( Form W-2G (PDF)), if the winnings are not subject to regular gambling withholding.

Withholding rules: When you open a new account, make an investment, or begin to receive payments reportable on Form 1099, you must furnish your TIN to the bank or other business. In some cases, you must furnish your TIN in writing and certify under penalties of perjury that it is correct. The bank or business will give you Form W-9 (PDF), Request for Taxpayer Identification Number and Certification, or a similar form. You must enter your TIN on the form and, if your account or investment will earn interest or dividends, you must also certify that you are not subject to backup withholding due to previous underreporting of interest and dividends.

The payer must withhold at a flat 28% rate in the following situations:

  • You do not give the payer your TIN in the required manner.
  • The IRS notifies the payer that the TIN you gave is incorrect.
  • The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.
  • You fail to certify that you are not subject to backup withholding for underreporting of interest and dividends.

How to prevent or stop backup withholding: If you receive a "B" notice from a payer notifying you that the TIN you gave is incorrect, you usually can prevent backup withholding from starting or stop it once it has begun, by giving the payer your correct name and TIN. You must certify that the TIN you give is correct. If you receive a second "B" notice from that payer, you will need to provide the payer with a copy of your social security card that shows your correct name and social security number.

If you have been notified that you underreported interest or dividends, you must request and receive a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun.

Backup withholding credit: If you had income tax withheld under the backup withholding rule, take credit for it on your tax return for the year in which you received the income.

If you operate as a partnership or subchapter S corporation, any monies withheld due to an incorrect name or TIN can be claimed only by the partners and shareholders on their individual income tax returns for their shares of the withheld amounts. The monies are not refundable to the partnership or subchapter S corporation.

You can find more detailed information on backup withholding in Publication 1281 (PDF), Backup Withholding for Missing and Incorrect Name/Tin(s), including the procedures for payers, and in Publication 505, Tax Withholding and Estimated Tax.

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Page Last Reviewed or Updated: April 20, 2016