Backup withholding
Backup withholding is the flat 24 percent a payer must withhold from certain payments, such as Form 1099-NEC nonemployee compensation, when the IRS requires it.
Backup withholding applies to reportable payments such as interest, dividends, and nonemployee compensation, not to regular wages. You withhold 24 percent of the payment itself, not the reported amount, and remit it to the IRS like withheld income tax. Backup withholding is not employment tax, so it goes on Form 945 rather than the quarterly Form 941Form 941. Form 941 (Employer’s Quarterly Federal Tax Return) reports wages paid, federal income tax withheld, and both shares of Social Security and Medicare tax.Click to open the term. The amount shows in box 4 of the recipient’s Form 1099-NECForm 1099-NEC. Form 1099-NEC is the IRS information return you file to report nonemployee compensation: payments for services to an independent contractor or other nonemployee.Click to open the term or Form 1099-MISC. The payee claims it as a credit against their own tax liability when they file a return.
When does backup withholding apply?
Independent contractors are a common payroll trigger. A missing taxpayer identification number (TIN), usually no Form W-9 on file, turns an ordinary Form 1099-NEC payment into a withholding event. Employee pay already has income tax withheld through Form W-4Form W-4. Form W-4 is the IRS form an employee completes to tell their employer how much federal income tax to withhold from each paycheck.Click to open the term elections instead. Form 945 is the annual return that reports backup withholding, due January 31 or the next business day (February 10 if you deposited all the year’s tax on time). Form 945 deposits stay separate from Form 941 deposits, on their own deposit schedule.
| TRIGGER | APPLIES TO |
|---|---|
| The payee fails to provide a TIN on Form W-9 | Any reportable payment |
| An IRS notice flags a name and number mismatch on a prior filing | Any reportable payment |
| The payee never certifies, under penalties of perjury, that backup withholding does not apply | Interest and dividends only |
| The IRS notifies you that the payee underreported that income | Interest and dividends only |
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.