 Internal Revenue Service IRS tax news. Fast facts to help taxpayers understand back up withholding. Fast fact number one, the IRS wants your money. Fast fact number two, what really isn't the right word? The IRS demands your money or else, and don't even ask or else what. You know the IRS has those two sticks, penalties and interest that they'll hit you with, metaphorically speaking. Fast fact number three, the IRS also wants other people's money. Fast fact number four, the IRS would like you to just pay them instead of the other people you were going to pay, you know, to cut out the middleman. Because, like, it's just easier for everyone that way. IRS tax tip 2022-93 June 16, 2022. Under the tax law, payers are responsible for knowing who they are paying. To accomplish this, payers are required to collect a legal name and taxpayer identification number or TIM from vendors they pay. So if you're a business owner and you need to have a job done, such as a fence being painted, you might think it would be as easy as asking someone, hey, do you know how to paint the fence? If they do, shake hands on it, agree on a price. Once the fence is painted, you simply pay them, only needing to know more about them other than the fact that they could paint the fence possibly in order to write them the check. But from the IRS perspective, they want more information about the person that you are paying. And this is important to just kind of have a general understanding of how the income tax system works. There's two sides to every transaction. One side is going to have the expense. The other side is going to have basically the income side of things. The leverage from the IRS side of things is to ask the person that is paying to give the information about the person they are paying to. So the IRS has that information and kind of double check, look over the shoulder of the person that's receiving the income. Why is the leverage on the payer side of things? Because the payer wants the deduction, which the deduction is good for income taxes. So they're going to say, hey, if you want the deduction, you need to tell us who you are paying so that we can follow up on them. That's why oftentimes you might see the IRS or the government wanting more people to be in the form of an employee-employer relationship. Because that's a relationship in which the IRS has more leverage to force the employer to do the reporting needs, not for the business purposes sake, but to report the income to the IRS. If you have a contractor, then you have less of the requirements than an employee possibly, but you still have possibly the requirements for the 1099 information, which includes their TIN number and so on, so that you can report that to the IRS and the IRS can kind of follow up on that. Note this also kind of works best from the IRS's perspective for businesses. If your business paying another business or sole proprietor, they have some leverage over that transaction. However, if you're an individual paying another individual that's a sole proprietor like a hair salon or like a nail salon or something like that, a restaurant oftentimes, then the IRS has less leverage. And that's why they're historically kind of not liking those businesses as much. That might be some reason why they crack down during the COVID-19 on the cash-based businesses, but maybe not. But in any case, so that's an area where the IRS doesn't usually have as much of an iron grip over the system and can't get their side of the reporting of the income. Okay, so keeping that in mind, generally backup withholdings, there's a link to that here, is required when a service vendor does not provide the payer their TIN timely or accurately. So what if you ask someone that's a sole proprietor and you're saying, hey, look, the IRS is coming after me. If I don't give you a 1099, then they might penalize me on it. But the person in your pain is going to say, well, I'm not going to give you my information. I don't want to give you my social security number or possibly they don't have an employee identification number. They don't give it to you. Well, then the IRS is going to say, well, you can't tell us who you paid. If you want the deduction, then we're going to hold you responsible for it. We want you to actually withhold the money in a similar fashion as you would if they're an employee, but possibly even more severely because you don't have a W-4 to do the proper withholdings. So the withholdings might be higher than they otherwise would. So this type of withholding can apply to most payments reported on certain form 1099 or W-2G. So here's what taxpayers need to know about backup withholding. Backup withholding is required on certain non-payable amounts when certain conditions apply. So remember, if you're an employee, employer situation, the employer is acting as the IRA's collection person because they have to because they want the deduction and if they don't, they're getting hits with it. If they're a contractor situation, then they have to 1099, but they don't have to do the withholdings unless they can't report the income properly in most cases because they don't have the TIN number in which case they want you to actually withhold the money, which of course would not be something that the recipient would be happy with generally. So the taxpayer making such payments to the payee doesn't generally withhold taxes and the payees report and pay taxes on this income when they file their federal tax returns. There are, however, situations when the payer is required to withhold certain percentage of tax to make sure the IRS receives the tax due on this income. So you've got to be looking out for the IRS whenever you're making any transaction. Make sure that you're looking out for your good buddy, the IRS. So backup withholding is set at a specific percent, so the current rate is 24%. It's kind of fairly high possibly, but it might be higher in other words than you might see if you had a W-4 withholdings, but you don't know what the withholdings are because you don't know what the other person's income is and there's a progressive tax system so we don't know what rate to withhold, so they got a flat rate of 24 if you got to do that. Payments subject to backup withholdings include interest payment, dividends, payment card or third-party network transactions, patronage dividends, but only if at least half the payment is in money, rents, profits, or other gains, commissions, fees, or other payments for work done as an independent contractor. For most people, that's probably the one that might come up most often. You're paying an independent contractor. You think you're supposed to send them a 1099. The contractor doesn't give you their proper information, name, and the TIN number. Payments by brokers, barter exchanges, payments by fishing boat operators, but only the part that is paid in actual money and that represents a share of the proceeds of the cash royalty payments, gambling windings, if not subject to gambling withholding, taxable gains, grants, agriculture payments. So examples when the payer must deduct backup withholdings. So let's see what it looks like. If a payee has not provided the taxpayer identification number, so you're saying, hey, the IRS is going to come after me if I don't give you, if I don't rat you out, like the IRS is supposed to tell me too. If I tell them how much I paid you, the IRS is going to come after me and I don't want that. So I've got to give them your information. They're like, no, I'm not going to give you my TIN or my social security number or whatever. That's kind of what the situation might look like. So a TIN specifically identifies the payee. TINs include the social security number. So if you're a sole proprietor and you don't have any employees, then you might just use your social security number. And in that case, of course, they're more reluctant to just be giving out their social security number. So they might want an employer identification number. So you might want to be, when you contract with someone, you might want to say, okay, are you a sole proprietor? If so, then you might want to be asking upfront, do you have an employer identification number that you could give me, right? If not, do you have a social security number that you're willing to give me to do work? And you want to kind of get that down upfront because they might not be fully aware of all this stuff. And if you're asking for the social security number, that can be awkward situation. So individual taxpayer identification number and that number as well. And then the adoption taxpayer identification number. So if the IRS notified the payer that the payee provided an incorrect TIN, that is the TIN does not match the name in IRS records. So payees should make sure that the payer has their correct name and TIN to avoid backup withholding. So if the IRS comes back and says, hey, we got, you gave us the wrong TIN number, then again, the IRS is going to be pissed at you for not giving them the right information or whatever. So more information can be down below backup withholding B program. There's a link to that here. Publication 1281 backup withholding for missing and incorrupt names and TINs. There's links to that stuff here. There'll be a link to this in the description.