What is Backup Withholding
Backup withholding is an additional amount of money taken out of wages, salaries, and other payments. It is a tax that is backed up by the IRS in case a taxpayer fails to report the payment on their taxes. The reason why backup withholding is imposed is that the IRS hopes to collect taxes owed, as well as ensuring compliance with tax regulations.
When is Backup Withholding Required?
Backup withholding is imposed when a payee does not provide their taxpayer identification number (social security number or other forms accepted) to the payer. It is also imposed if the taxpayer is reported to the IRS as having underreported interest or dividend payments on their tax return, or if they fail to properly report the amount of their wages and salaries.
The tax imposed by backup withholding is higher than the normal payroll taxes, but this is to ensure that taxes are paid in time and in full.
How to Avoid Backup Withholding?
To avoid backup withholding, taxpayers must provide correct information to the payers. Taxpayers must be sure to report any income not reported to the IRS on their tax returns, and to provide their correct taxpayer identification number. It is also important to check with the payer to make sure that their records regarding taxpayer identification numbers are up to date.
In some cases, a payer may apply for a waiver of backup withholding for some of their payees. This is generally done when the payee is unable to provide correct information to the payer, or if the payer knows that there is no likelihood of underpayment or non-reporting of income. Additionally, the waiver can be applied for when the payer knows that the payee has been given an extension to file their taxes.
Taxpayers can also request a refund or credit for any excess backup withholding on their taxes. By filing the correct forms with the IRS, taxpayers can be credited for any excess taxes taken out of their income.
Conclusion
Backup withholding is a tax that is imposed when a taxpayer does not accurately report their income or fails to provide their correct taxpayer identification number to a payer. It is important to report any income not reported to the IRS on a tax return, and to provide the correct taxpayer identification number. Additionally, taxpayers can apply for a waiver of backup withholding if they are unable to provide correct information or if they have been given an extension to file their taxes. Lastly, taxpayers can request a refund or credit for any excess taxes taken out of their income.