Backup Withholding

What is Backup Withholding?

You are required by the IRS to correctly report your Taxpayer Identification Number (TIN), either as a Social Security Number (SSN) or an Employer Identification Number (EIN). In addition, you must correctly report all interests and dividends you’ve received, and income from the following sources:

• Attorney’s fees (Form 1099-NEC) and gross proceeds such as settlements paid to an attorney (Form 1099-MISC)
• 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-NEC) 
• 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) 
• 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 
• Certain Government Payments, Form 1099-G

If you do not correctly complete any requested information for the IRS, the IRS will require a backup withholding. 

• Under the BWH-B program because you failed to provide a correct taxpayer identification number (TIN) to the payer for reporting on the required information return. A TIN can be either your social security number (SSN), employer identification number (EIN), or individual taxpayer identification number (ITIN); or
• Under the BWH-C program  because you failed to report or underreported interest and dividend income you received on your federal income tax return; or you failed to certify that you’re not subject to BWH for underreporting of interest and dividends. 

The IRS will withhold at a current rate of 24 percent. This 24 percent tax is taken from any future payments to ensure the IRS receives the tax due on this income. Any funds withheld will not be released until your following tax year, provided you have resolved the errors with the IRS. 

Please note: Gravity Payments does not withhold your income. 

How do I avoid Backup Withholding?

According to the IRS, “to stop backup withholding, you’ll need to correct the reason you became subject to backup withholding. This can include providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing return(s), as appropriate”.