What Is Backup Withholding?
Backup withholding is income tax withholding the IRS requires for workers who are not full-time, salaried, W-2 employees (like freelancers or independent contractors). You know that you don’t have to withhold income taxes from payments your business makes to nonemployees, but you are required to have a W-9 form signed by each of these workers or contractors. A W-9 form is like a W-4 form but for nonemployees and includes information on the person’s name and address, and most importantly, their taxpayer ID number. When a nonemployee’s taxpayer ID number is missing or wrong, the IRS may send a backup withholding notice to the employer in order to seek tax payments. When that happens, there are a few steps you can take.
What To Do With a Backup Withholding Notice
A backup withholding notice, sometimes called a “B” notice, states that the nonemployee’s taxpayer ID number is either missing or incorrect. When you receive the first IRS notice, you should follow these steps:
What If You Receive a Second Backup Withholding Notice?
The second “B” notice tells the individual taxpayer to contact the IRS or Social Security Administration to obtain a correct taxpayer ID number. You as the employer are not required to do anything except continue to withhold income tax from the taxpayer’s payments until you receive a new W-9 form from the individual.
What Is a Backup Withholding ‘C’ Notice?
A “C” notice is a backup withholding notice from the IRS stating that the nonemployee has understated interest and dividend income and is subject to backup withholding. When you receive the first “C” notice, you should immediately start withholding taxes at the rate of 24% from that nonemployee’s pay.
Reporting and Paying Backup Withholding to the IRS
When you start backup withholding from a person’s income, you’re not done with the IRS. You must pay these withheld taxes to the IRS, report on the payments you made, and include the information on backup withholding on the person’s Form 1099.
Making Backup Withholding Payments
Backup withholding payments are not made through the same process as for employee income. Make payments separately, using electronic funds transfer (EFT).
If the total amount for all backup withholding payments is less than $2,500 for the year, you may make payments along with the annual report form (IRS Form 945). If the total is more than $2,500, use either the semi-weekly or the monthly schedule to make deposits.
Reporting Annual Backup Withholding Payments to Independent Contractors
You’ll need to include the total backup withholding payments for each contract worker on their 1099 form for the tax year. Give it to the person and file it with the IRS by Jan. 31 of the year following the tax year. They’ll need it to file their taxes.
