Backup withholding and Form 945: nonpayroll federal tax withholding

When you pay certain kinds of income to someone, you generally need their correct taxpayer identification number. If they do not give you one, or the IRS tells you the number is wrong, you may have to withhold a flat percentage of the payments and send it to the IRS. This is backup withholding. The rate has been 24 percent, so check the current rate in the IRS instructions.

It can apply to payments reported on certain Forms 1099, including payments to contractors and interest or dividends. The triggers include the payee not providing a TIN, the IRS notifying you that the TIN is incorrect, and the IRS telling you the payee underreported income. Collecting a Form W-9 before the first payment is how you avoid most of it.

If the IRS sends a notice that a payee's name and TIN do not match, you generally have to ask the payee for a corrected W-9 within a short time, and start withholding if you do not get one. A second notice within three years has different rules. Follow the instructions on the notice and keep your records.

Form 945 is the annual return that reports federal income tax withheld from nonpayroll payments, including backup withholding, along with pension and annuity withholding. It is separate from Form 941, which covers payroll. It is generally due by January 31 after the year ends. Deposit the withholding on the schedule the instructions set, and a smaller total can sometimes be paid with the return.

Track each payment subject to withholding with the payee, the gross amount, the amount withheld, the deposit date, and the related information return. Do not mix these balances with payroll liabilities. The total on the return should be explained by the individual records.