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Rev. date: 11/2005


Backup Withholding

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Tele-Tax Topic 307
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Banks and other businesses that make certain kinds of payments must file Form 1099, an information return, with the IRS. Generally, these payments are not subject to withholding; however they may be subject to backup withholding. Payments that may be subject to "backup withholding" include payments of interest, dividends, rents, royalties, payments to independent contractors for services, and broker payments. Under the backup withholding rules, the business or bank must withhold on a payment if:
  1. The payee did not provide the payer with a taxpayer identification number in the required manner,
  2. The IRS has notified the payer that the taxpayer identification number provided by the payee is incorrect.
  3. The IRS has notified the payer to start withholding on interest and dividends because the payee failed to report interest or dividends on an income tax return in prior years; or
  4. The payee failed to certify that it was not subject to backup withholding for underreporting of interest and dividends.
Payers who withhold income tax under the backup withholding rules must show the tax withheld on a Form 1099. The payee receiving the Form 1099 should report the amount of tax withheld in the payments section of the appropriate income tax return. Generally, the payer must furnish Form 1099 to the payee by January 31; however, Forms 1099 from brokers are due by February 15. The payee should contact the bank or business that made payments if the Form 1099 is not received by the due date.
More detailed information on backup withholding can be found in Publication 1281, Backup Withholding for Missing and Incorrect Name/Tin(s), including the procedures for payers, and in Publication 505, Tax Withholding and Estimated Tax.