Good News For Small Businesses! The IRS Has Announced A Reduction In The Backup Withholding Rate To 24%!
Yes, you heard that right! In keeping with the federal tax reform, the IRS has reduced the backup withholding to 24% (from the previous rate of 28%) for small businesses as well as other taxpayers in a revised backup publication – Publication 1281 (Backup Withholding for Missing and Incorrect Name/TIN).
Usually, backup withholding includes and applies many different situations such as if a taxpayer fails to provide his/her appropriate taxpayer identification number (TIN), or Individual Taxpayer Identification Number (ITIN), or Employer Identification Number (EIN), or even Adoption Taxpayer Identification Number (ATIN). Furthermore, backup withholding can also apply to situations where a taxpayer fails to report (more precisely underreport) his/her interest or dividend income while filing the federal income tax return and also to gambling winnings that are not subject to regular gambling withholding norms.
Other situations in which the backup withholding applies are :
- If a taxpayer fails to certify that he/she isn’t subject to the withholding for underreporting of interest or dividend income.
- Patronage dividends (provided at least half of the payment is in monetary terms).
- Commissions, fees or any other kind of payment that is received by an independent contractor.
- Payments made by fishing vessel operators (only that portion of the payment that’s made in monetary terms and comprises a certain share of the proceeds made from a catch).
- Third-party network transactions.
- Payments made by brokers.
- Barter exchange transactions.
- Royalty payments.
Basically, these situations are mostly the kind of payments that are reported on Form 1099.
What are the payments that are excluded from backup withholding?
There are many payments that are exempt from backup withholding such as:
- Unemployment compensation
- Long-term care benefits
- Real estate transactions
- Canceled debts
- Fish purchases for cash
- Foreclosures and abandonment
- Qualified tuition program earnings
- State or local income tax refunds
- Distributions from Archer MSAs
- Distributions from any retirement account
- Distributions from an employee stock ownership plan
By now, it is clear that backup withholding can be avoided if you are a little cautious and careful while specifying your TIN/ITIN/EIN/ATIN to the payer. And in situations of underreported income, you just need to rectify it by reporting your accurate interest/dividend income and pay the amount you owe.
Backup withholding can be reported on Form 945 (Annual Return of Withheld Federal Income Tax). In case your federal income tax was withheld under the backup withholding norm, you can report your income tax withholding (Form W-2G or Form 1099) on your tax return for the year when you received the income
Got any queries related to backup withholding or any other tax issue? Talk to our tax experts today! You can call us 1-(888)-482-0279 or write to us at firstname.lastname@example.org.