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What is Backup Withholding?

written by: Lucinda Watrous•edited by: Rebecca Scudder•updated: 6/4/2010

Have you ever heard the term backup withholding? Are you wondering who is subject to it or who is exempt from it? Read on to find out more.

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    What is Backup Withholding?

    Backup withholding is withholding from the federal government for income tax on certain types of income. Most of the time, taxpayers are exempt from backup withholding, but there are a few circumstances which make backup withholding mandatory. Anytime backup withholding is mandatory, the taxpayers will be notified directly by the IRS.

    Backup withholding may apply at a flat rate of 28% on the following forms of income:

    • Payments received as an Independent Contractor.
    • Interest and Dividends.
    • Rent
    • Royalties and Commissions
    • Any payments from brokers on stocks and bonds.
    • Any payments from fishing boat operators.

    A good rule of thumb to go by is that if the income is reported to the IRS with a 1099 form, it is likely to be subject to backup withholding.

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    Who is Subject to Backup Withholding?

    Anyone who has not filed the appropriate W9 form or has conflicting information compared to what the IRS has on file. These individuals will be notified directly by the IRS when they are subject to backup withholding. Backup withholding is generally required when someone owes federal taxes, or if the IRS has discovered a discrepancy in the interest reported.

    To avoid becoming subject to backup withholding, make sure all information is correct on all W9 forms, and all income, regardless of source, is correctly reported to the IRS.

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    Who is Exempt from Backup Withholding?

    Any citizens of the United States and resident aliens who files the appropriate W-9 documentation containing information matching the IRS records. If the name and social security number on the W-9 do not match what the IRS has on file, notification will be sent to the taxpayer. If you haven't received any notification stating you are required to have backup withholding, you are exempt from it, don't have to worry about it.

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    Legal Disclaimer

    As always, the information presented in this article should not take the place of advice from a legal tax professional. This article is meant for informative purposes only.