In the United States, backup withhold is a percentage withheld by the payers to be paid to the IRS (instead of to the payee). There are several reasons why backup withholding may be required. The payer must withhold 28% if:
1. Payee fails to furnish a correct TIN to the payer.
The payee fills out Form W-9 for the payer. The payer can run TIN matching to see if the TIN matches up with the name via the IRS database. If it doesnt match up, begin backup withholding on any reportable payments. Every year, send a letter soliciting the payee for the correct TIN. Continue backup withholding until you, the payer, receive a correct TIN.
2. IRS notice that the payee’s TIN is incorrect.
A “B” notice is a backup withholding notice. Its a letter from the IRS to the payer letting you know that a particular payee’s TIN is incorrect.
If you receive the first “B” notice, send that notice and Form W-9 to the payee to acquire a correct name/TIN combination.
A second “B” notice tells the payee to contact the IRS or SSA to obtain a correct name/TIN combination.
If you IRS sends you, the payer, a “B” notice letting you know that a payee’s TIN is incorrect, then withhold at 28% on any reportable payments made to the account more than 30 business days after you received the notice. Continue withholding until you receive a certified Form W-9.
3. IRS notice that the payee is subject to backup withholding due to payee underreporting.
Its a rare but simple letter. The letter notifies the payer that the payee has unreported taxable payments. The IRS notifies the payer in writing to continue backup withholding until a certain date.
4. Payee fails to certify that she or he is not subject to backup withholding.
Failure to follow the backup withholding rules can result in penalties to the payer for filing incorrect information returns. The payer may also become liable for any uncollected amounts.
Some states, like California, require an additional 7% backup withholding if it is already required by the IRS.
Backup withholding does not apply to wages or pension payments.
