What is Backup Withholding and How to Prevent It

Backup withholding is a specified percentage (currently 28%) withheld by the taxpayers to be paid to the IRS on some transactions reported on variants of Form 1099 for tax purposes. 
Backup withholding is required in certain situations. These include:

• Interest payments;
• Dividends;
• Patronage dividends, but only if at least half of the payment is in cash;
• 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 part that is in cash and that represents a share of the proceeds of the catch;
• Payment Card and Third-Party Network Transactions; and
• Royalty payments

 Backup withholding also may apply to gambling winnings, if the winnings are not subject to regular gambling withholding.

US citizens and resident aliens will be exempt from backup withholding if:

• You properly report your name and Social Security number to the payer using form W-9, and that information matches the IRS records, and
• You have not been notified by the IRS that you are subject to mandatory backup withholding.

 If you receive a "B" notice from payer, notifying you that the TIN you gave is incorrect, you usually can prevent backup withholding from starting or stop backup withholding once it has begun by giving the payer your correct name and TIN. If you receive a second "B" notice from that payer, you will need to provide the payer with verification of your TIN from SSA - Social Security Administration or the IRS.
If you have been notified that you underreported interest or dividends, you must request and receive a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun.
If the IRS determines that backup withholding should stop, it will provide you with certification and will notify the payers who were sent notices earlier.

If income tax has been withheld under the backup withholding rule, you should take credit for it on your tax return for the year in which you received the income. It will be reported to you and to the IRS using the appropriate form 1099.

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