Payments such as fees to an independent contractor — as opposed to an employee — are not typically subject to any withholding. The payees report and pay taxes on this income when they file their federal tax returns. However, there are exceptions. Explains the IRS, backup withholding is required on certain nonpayroll amounts when certain conditions apply. The IRS wants to make sure it gets its cut, and the current standard withholding in these situations is 24%.
Payments subject to backup withholding
Backup withholding can apply to most kinds of payments reported on forms 1099 and W-2G. Below are just some of the payments:
Note that the Form 1099-NEC is still new, and it may be confusing which version of Form 1099 you should use. Work with a tax professional on this.
Rules for receiving Form 1099-related payments
When payees open a new account, make an investment or begin to receive payments reportable on Form 1099, they must furnish a Taxpayer Identification Number in writing to the bank or other business and certify under penalties of perjury that it's correct. (For individuals, their TIN is typically their Social Security number.) In some cases, the bank or business has to give the payee a Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form. The payer should fill it out and return it promptly.
If an account or investment will earn interest or dividends, the payee must also certify that he or she is not subject to backup withholding due to previous underreporting of interest and dividends.
Situations requiring backup withholding
Backup withholding may be required in the following situations:
To stop backup withholding, payees will need to correct the reason they became subject to it in the first place. This can include providing the correct TIN to the payer, resolving the underreported income and paying the amount owed, or filing the missing returns, as appropriate.
Everyone has a reason to cooperate with this system: Payees want to get all their money up front without having to wait to file. And if payers do not deduct backup withholding when required, they become liable for the taxes.
Consult a tax professional to make sure you're following the rules.
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