Backup Withholding: Know the Story

1099, you must provide your taxpayer identification number (often your Social Security number). For certain types of payments, you need to provide your taxpayer identification number in writing, certifying under penalties of perjury that it's correct.

When you open a new account, make an investment or begin to receive payments reportable on Form 
Backup withholding can apply to most kinds of payments reported on Form 1099, including:

• Interest payments.
• Dividends.
• Patronage dividends, but only if at least half 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.
• Payment card or third-party network transactions.
• Royalty payments.
• Gambling winnings on proceeds not subject to regular gambling withholding.

Banks or other businesses will request a taxpayer identification number and certification for their tax purposes. If your account or investment is expected to earn interest or dividends, you also must certify that you're not subject to backup withholding due to previous underreporting of interest and dividends.

When you're subject to backup withholding, you'll find the rate to be a flat 24 percent, and this will happen when:

• You don't give the payer your taxpayer identification number in the required manner.
• The Internal Revenue Service notifies a payer that the taxpayer identification number you gave is incorrect.
• The IRS notifies a 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're not subject to backup withholding for underreporting of interest and dividends.

At this point, you'd like to know how to stop backup withholding. To do so, you need to correct the reason you became subject to it in the first place. You can provide a correct taxpayer identification number to a payer, for example, and this will resolve the underreported income, having to pay an amount owed or having to file missing returns.

If you receive a notice from a payer notifying you that the taxpayer identification number you provided is incorrect, you'll be able to prevent backup withholding from starting, or stop it once it has begun, by giving the payer your correct name and taxpayer identification number, as well as by certifying that the taxpayer identification number is correct. Then, if you receive a second notice from the payer, you'll need to provide a copy of your Social Security card showing your correct name and SSN.

If your Form 1099 shows an amount withheld under the backup withholding rules, report the amount as federal income tax withheld on your income tax return for the year you received the income. If you operate a partnership or subchapter S corporation, any backup withholding can be claimed only by partners and shareholders. They should report their respective shares of the withheld amounts on their individual income tax returns. The amounts are not refundable to the partnership or subchapter S corporation.

Let us know if you've run into backup withholding problems.