What to Do With an IRS Backup Withholding Notice

Backup Withholding Notices
What to Do with Backup Withholding Notices. PeskyMonkey/Getty Images

What is an IRS Backup Withholding Notice? What Do I Do When I Receive One?

Backup withholding is income tax withholding required for non-employees (including independent contractors) and other transactions. Employers are not required to withhold income taxes from non-employees unless the individual's taxpayer ID number cannot be verified. Stated differently, employers must withhold income taxes from non-employees if the non-employee's taxpayer ID number cannot be verified.

In this case, you will receive a notice from the IRS. This article discusses these notices and explains what you must do when you receive them.

What Is a "B" Notice? What Must I Do If I Receive This Notice?

A "B" notice is a backup withholding notice from the IRS stating that the non-employee's taxpayer ID number is either missing or incorrect. When you receive the first IRS notice, you must:

  1. Immediately start withholding taxes at the rate of 28% from that non-employee's pay, no later than 30 days after you receive the notice
  2. Send a copy of the "B" notice to the individual.
  3. Send the individual a an IRS W-9 form and request that it be completed and returned to you to send to the IRS.

If you cannot find the taxpayer, the taxpayer refuses to complete Form W-9, or the "B" notice is returned as undeliverable, you must immediately start backup withholding (28% tax rate) from the payments made to that person.

What is a Second "B" Notice? What Must I Do With This Notice?

The second B notice tells the individual taxpayer to contact the IRS or Social Security Administration to obtain a correct Taxpayer ID Number. You as the employer are not required to do anything except continue to withhold income tax from the taxpayer's payments.

What Is a "C" Notice? What Must I Do When I Receive This Notice?

A "C" notice is a backup withholding notice from the IRS stating that the non-employee has understated income and is subject to backup withholding. When you receive the first "C" notice, you must:

  1. Immediately start withholding taxes at the rate of 28% from that non-employee's pay, no later than 30 days after you receive the notice
  2. Send or give a copy of the "C" notice to the individual.

If you receive a "B" notice or "C" notice, you must continue withholding until you are informed by the IRS to stop withholding.

When in doubt as to what to do, always start backup withholding on payment made to an individual (at the rate of 28%). Let the taxpayer sort out the taxpayer ID problem with the IRS.

Reporting and Paying Backup Withholding to the IRS

When you withhold backup withholding from a person's income, you're not done with the IRS. You must pay these withheld taxes to the IRS, report on the payments you have made, and include the information on backup withholding on the person's 1099-MISC. 

Making Backup Withholding Payments

Backup withholding payments are not made through the same process as for employee income. Make payments separately, using electronic funds transfer (EFT).

 

  • If the total amount for all backup withholding payments is less than $2,500 for the year, you may make payments along with the annual report form (IRS Form 945) (see below). 
  • If the total is more than $2,500, use either the semi-weekly or the monthly schedule. But remember not to include these payments with those for employee to determine which schedule to use. 

See Chapter 11, IRS Publication 15, for more details. 

Reporting Backup Withholding Payments 

You must report payments you collected for backup withholding, on Form 945, Annual Return of Withheld Federal Income Tax.  Form 945 is due by January 31 of the year after the tax year. So, for 2016 backup withholding, you must file Form 945 with the IRS by January 31, 2017. 

See the Instructions for Form 945 for more information. 

Reporting Annual Backup Withholding Payments to Independent Contractors

Be sure you include the total backup withholding payments for each contract worker on their Form 1099-MISC for the year. Give it to the person and file it with the IRS by January 31 of the following year. 

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