In a recent Tax Tip, the IRS reminded taxpayers that the Tax Cuts and Jobs Act (TCJA) lowered the backup withholding rate for 2018 to 24 percent. Aside from highlighting that the change will affect the upcoming tax season, the agency pointed to resources for those who want to learn more about backup withholding.
Backup withholding generally applies to taxpayers who underreport interest and dividends or forget to give some form of taxpayer identification number (TIN) when receiving payments that can be “reported on Form 1099” to the party handing over the money. According to the IRS’ “Backup Withholding” page, a taxpayer receiving payment would normally consider it part of income when filing a return, but not giving a TIN to the person making the payment means that person must preemptively withhold 24 percent of the payment to “ensure the IRS receives the tax due on this income.” And, according to the IRS, backup withholding applies in the following scenarios:
- 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
Those who are unfamiliar with TINs might wonder what types of identifying numbers qualify. Well, the usual suspects—Social Security Numbers (SSNs) and employer identification numbers (EINs)—are accepted as TINs for the purposes of preventing backup withholding, and the IRS noted that individual taxpayer identification numbers (ITINs) and adoption taxpayer identification numbers (ATINs) will also work.
For more information about backup withholding, the IRS provided links to “Publication 505, Tax Withholding and Estimated Tax;” “Publication 1335, Backup Withholding Questions and Answers;” “Form 945, Annual Return of Withheld Federal Income Tax; Publication 15, Employer’s Tax Guide;” and the updated “Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s).”