What is Backup Withholding and How Can You Avoid It?

What is Backup Withholding and How Can You Avoid It?

Indevia plays a key role in identifying potential liabilities through their professional review process. One issue commonly found across multiple fields is called backup withholding. By working with Indevia, clients are able to avoid this inconvenient process.

It is not uncommon for our franchisee clients to receive deposits from gift card redemptions. These deposits became subject to a liability called Backup Withholding (BWH). But knowing what to do about this is not always a straightforward matter. So below, we cover a few key aspects of backup withholding to show how you can avoid running into it.

What is backup withholding?

Backup withholding is a federal income tax withheld by payers from payments made to payees, as per IRS backup withholding regulations. The tax rates are 24% for U.S. citizens and residents or 30% or 10% for non-resident foreign persons. This withheld money is typically sent directly to the IRS, but it doesn’t always need to occur.

What factors contribute to tax withholding?

Backup withholding can be required in a few different situations, and each of them is avoidable in their own way. The three most common factors that can lead to backup withholding being required include:

1. Failing to provide a correct taxpayer identification number (TIN) for reporting purposes.

2. Failing to report or under-reporting interest or dividend income on your federal income tax return.

3. Failing to certify that you’re not subject to BWH for under-reporting interest and dividends.

How can you avoid backup withholding?

1. Provide accurate information, including correct TIN and legal name matching.

2. Report all taxable interest and dividend income or claim exemptions as a foreign person.

3. Resolve under-reported income, pay amounts owed, and file any missing tax returns.

How can you recover backup withholding credit?

Fortunately, backup withholding can be offset by receiving credit for the withholdings. The way to go about this involves reporting the withheld federal income tax on your annual tax return in which you received the income. The credit for amounts deducted by the payer can be claimed while filing the federal tax return. The best way to recover from backup withholding is to prevent it entirely, saving you the time and stress required to deal with it.

The Advantage of Indevia

Backup withholding is but another example of the challenges presented in going at accounting and finance on one’s own without a team of experts. The team at Indevia has spent years learning the ins and outs of all aspects of company finance and accounting, ensuring that we can provide outstanding service that saves your business time and money. Contact us today to begin working with a world-class team who can bring your company tangible results.

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