IRS revises backup withholding guide for new tax law

The Internal Revenue Service has posted a revised publication on backup withholding for taxpayers with missing or incorrect names or Taxpayer Identification Numbers, reflecting the reduced 24 percent withholding rate in the Tax Cuts and Jobs Act.

Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), has been updated to reflect one of the changes in the tax overhaul that Congress passed last December. As a result of the change, starting Jan. 1, 2018, the backup withholding tax rate dropped from 28 to 24 percent.

Backup withholding applies in different situations such as when a taxpayer fails to supply their correct Taxpayer Identification Number to a payer, such as an employer. Typically, the TIN is the same as the taxpayer’s Social Security number, but in some cases, it can be an Employer Identification Number, Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number. The IRS may also require backup withholding to be applied when a taxpayer has underreported their interest or dividend income on their tax return.

IRS-Building-light
The IRS headquarters building in Washington, D.C.

Publication 1281 provides other handy information to help payers who have to impose backup withholding on any payees, including a set of 34 frequently asked questions and answers. One of the FAQs says a payer who mistakenly backup withheld at an incorrect rate (such as the old 28-percent tax rate instead of the new 24-percent rate) doesn’t need to refund the difference to the payee. But a payer who opts to refund the difference has to do it before the end of the year and can then make the necessary adjustments to their federal tax deposits.

When backup withholding applies, payers have to backup-withhold tax from payments that aren’t otherwise subject to withholding. Payees could be subject to backup withholding if they:

• Fail to provide a TIN,

• Give the wrong TIN,

• Provide the TIN in the wrong way,

• Underreport interest or dividends on their tax return, or

• Fail to certify that they’re not subject to backup withholding for underreporting of interest and dividends.

Backup withholding can apply to most types of payments reported on Form 1099, including:

• Interest payments;

• Dividends;

• Rents, profits or other income;

• Commissions, fees or other payments for work performed as an independent contractor;

• Payments by brokers and barter exchange transactions;

• Payments by fishing boat operators, but only the portion that's in money and represents a share of the proceeds of the catch;

• Payment card and third-party network transactions; and

• Patronage dividends, but only if at least half of the payment is in money;

• Royalty payments.

Backup withholding can may apply to gambling winnings not subject to regular gambling withholding.

To stop backup withholding, the payee needs to fix any issues that led to it. They might need to give the right TIN to the payer, resolve the underreported income and pay the amount that’s owed, or file a missing tax return. The Backup Withholding page, Publication 505, Tax Withholding and Estimated Tax and Publication 1335, Underreporter Backup Withholding Questions and Answers offers additional information.

Payers report their backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. The 2018 form is due on Jan. 31, 2019. For extra details about depositing backup withholding taxes, see Publication 15, Employer’s Tax Guide. Payers also have to show any backup withholding on the information returns, such as Forms 1099, that they furnish to their payees and file with the IRS. Like regular federal income tax withholding, payees can claim credit for any backup withholding when filing their 2018 federal income tax return.

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