Back-up withholding is ordered by the Internal Revenue Service under certain circumstances in which not enough tax is being paid or the correct tax identification number has not been recorded. Anyone who does not fall into such a category is exempt from back-up withholding unless they fail to mark that they are exempt on their tax documents. In that case, back-up withholding begins until the document is properly marked.
Back-up withholding is applied to several situations including rental income, royalties on work products, payments from stock brokers, fishing boats and independent contractor work. Interest and dividend payments may also be subject to back-up withholding, according to IRS.gov.
When you begin a new job, you are required to fill out a W-9 form for your employer. The company uses the information you provide on that form to determine how much tax to withhold each pay period. It sends the withheld tax into the Internal Revenue Service on your behalf. As long as you fill out the form with the correct Social Security number, you will be exempt from back-up withholding with regards to your payroll taxes. If the number you provide does not match what the Internal Revenue Service has on file for you, you are not exempt until the matter is resolved to the satisfaction of the IRS.
Tax Debt Triggers
Employees and independent contract workers who owe back federal taxes are typically at risk for being notified by the IRS they are subject to back-up withholding. For those current on their taxes and do not owe back taxes to the federal government, barring other issues, are exempt from back-up withholding.
Most people are exempt from back-up withholding. Those who are notified that they are subject to it can become exempt again if the withholding is triggered by something simple, such as a wrong Social Security number being filed. If the back-up withholding is due to back federal taxes, people can become exempt again by paying the tax debt in full.
- IRS.gov: Basics of Backup Withholding
- State of North Carolina; Office of the Comptroller: Backup Withholding Requirements Policy
- IRS. "Topic No. 307 Backup Withholding." Accessed June 24, 2020.
- IRS. "Backup Withholding." Accessed June 24, 2020.
- IRS. "Reduced 24-Percent Withholding Rate Applies to Small Businesses and Other payers; Revised Backup Withholding Publication Features Helpful FAQs." Accessed June 24, 2020.
- IRS. "Backup Withholding for Missing and Incorrect Names/TINs," Page 11. Accessed June 24, 2020.
- IRS. "Publication 505 (2019), Tax Withholding and Estimated Tax." Accessed June 24, 2020.
Candace Webb has been writing professionally since 1989. She has worked as a full-time journalist as well as contributed to metropolitan newspapers including the "Tennessean." She has also worked on staff as an associate editor at the "Nashville Parent" magazine. Webb holds a Bachelor of Arts in journalism with a minor in business from San Jose State University.