The IRS updated Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), last month to reflect a key change as part of the Tax Cuts and Jobs Act (TCJA). Effective January 1, 2018, the backup withholding tax rate dropped from 28 to 24 percent.
Among other circumstances, backup withholding applies when a taxpayer fails to provide their correct taxpayer identification number (TIN) to a payer or when a taxpayer underreports interest or dividend income on their federal tax return.
What if I mistakenly backup withheld at the previous rate?
If you mistakenly backup withheld at the 28 percent rate, you are not required to refund the difference. However, you may do so if you have not yet deposited the improperly withheld tax. If you choose to refund the improperly withheld tax to the payee, it must be done prior to the end of the year and prior to issuing the Form 1099.
Who is subject to backup withholding?
Payees may be subject to backup withholding if they:
- Fail to give a TIN;
- Give an incorrect TIN;
- Provide a TIN in an improper manner;
- Underreport interest or dividend income on their tax return;
- Fail to certify that they are not subject to backup withholding.
In order to stop backup withholding, the payee must correct the issues that caused it, whether that is providing the payer with their correct TIN, resolving the underreported income, or filing a missing return.
What type of payments does backup withholding apply to?
Backup withholding applies to various types of payments reported on Form 1099, including:
- 1099-INT (interest payments);
- 1099-DIV (dividends); and
- 1099-MISC (rents, profits, other income, fishing boat proceeds, royalty payments, and certain gambling winnings).
How is backup withholding reported?
Backup withholding is reported by payers through Form 945, Annual Return of Withheld Federal Income Tax. This form is due to the IRS by January 31, 2019. It is also reported on the information returns furnished to their payees and filed with the IRS.