The Basics of Backup Witholding

You may have heard of backup withholding and wondered what, exactly, it is. Basically, backup withholding is a type of tax withholding on certain types of income. It is also a relatively rare type of withholding since most taxpayers are exempt from it.     

With that said, though, backup withholding can and often does occur on the following types of income: 

·         Interest

·         Commissions

·         Dividends

·         Fees paid to independent contractors

·         Patronage dividends

·         Royalties

·         Rents

·         Payments from fishing boat operators

·         Payments from brokers for stock and bond transactions

Of course, a person can be exempt from backup withholding under certain circumstances.  In fact, United States citizens and resident aliens who report their name and social security number via Form W-9 and whose information properly matches the IRS’ information are generally exempt.

However, backup withholding, as mentioned, can and does happen. And, when it does, it is often for very specific reasons. These include:

·         The payer was not provided with your taxpayer identification number

·         You do not certify that you are not subject to backup withholding when required

·         The taxpayer identification number you provided was found to be incorrect

·         You have underreported interest or dividends

Obviously, you do not want to be subjected to backup withholding. Thus, it is important that you do not make any of the mistakes above. You can help keep these mistakes from happening by using a financial adviser. These professionals can ensure that there are no mistakes on your tax returns and that you have done everything possible to avoid backup withholding, thereby making it a lot less likely that it will happen to you.