how backup withholding works
investors commonly earn income for example interest payments dividends and distributions from assets in which they have invested while this income is taxable at the time it is received the taxes owed on a calendar year s investment income only come due once every year during tax season investors could potentially spend all of their investment income before the annual income taxes come due this could render them unable to pay taxes leaving the irs with the difficult and expensive job of collecting the taxes owed it is primarily this risk that motivates the government to sometimes require backup withholding taxes to be levied by financial institutions at the time investment income is earned members who receive at least 10 in cooperative patronage dividends reported on irs form 1099 patr might also be subject to backup withholding as well some taxpayers are exempt from backup withholding if you ve reported your name and social security number ssn to the payer with form w 9 and it matches the irs documentation and if the irs has not notified you that you are subject to mandatory backup withholding you could be exempt 1payments subject to backup withholdingfor those not exempt the following are common payment types that could be subject to backup withholding backup withholding is used by the irs to make sure it collects taxes on income that an investor may have already spent before his or her tax bill comes due withholding due to incorrect informationtaxpayers may also be subject to backup withholding if they did not provide the correct tin or if they did not report dividend interest or patronage dividend income to the irs other types of payments also subject to backup withholding include rents royalty payments profits commissions fees and other payments for work as an independent contractor gambling winnings may also be subject to backup withholding if they were not subject to standard gambling withholding if a contractor or investor does not provide the correct tin to receive payments that are reportable on form 1099 the payer is required to withhold at a rate of 24 payers might also be required to withhold at that rate if the irs informs them that the payee s underreported interest or dividends on their income tax returns in such an instance the tax filer will be notified four times over 120 days of the issue and the intent to institute backup withholding if a tax filer s 1099 indicates backup withholding that amount can be applied as a credit against any income tax filing for that year 3withholding due to unreported investment incomethe irs may also require backup withholding if you or your broker don t or didn t report dividend or interest income received from investments held this is less common due to automated reporting by most brokerage firms if you fail to report or underreported interest or dividends the irs will notify you via four notices mailed to your home address over a period of seven months regarding future backup withholding 3