What is backup withholding in form W-9?

W-9 is a document that has to be filled mostly by freelancers, independent contractors and vendors. You can also receive a request when you inherit property, rent apartment with a security deposit or get income from financial institutions. Note that a foreign person has to deal with W-8 instead.

The form requests you to give personal information, including your TIN, name and business name, entity type etc. One of the fields asks you about your IRS form W-9 backup withholding status. Let’s find out what is it and how to fill the appropriate line.

Everything you need to know about tax withholding form W-9 rules

As a freelancer or independent contractor you receive payments for your services. In some situations the payer is obliged to withhold a fixed 24% tax rate on all future transactions to you. That may happen due to several reasons:

  1. You didn’t enter your TIN and sent the form with a blank field.
  2. IRS notified the requester that a TIN you’ve given is incorrect.
  3. You didn’t put a signature in certification part when required.
  4. You didn’t certify that you’re not a subject to backup withholding.
  5. You didn’t report all your interest and dividends on your income tax return.

As you can see, you don’t have to worry if you’ve enter correct data and reported all your income. Also, some business entities and transaction types are exempt from backup withholding in W-9. See a section with special codes in the Instructions part.

Transactions that are subject to backup withholding

Here is a list of payments that fall under the mentioned criterion:

  • dividends;
  • interest payments;
  • barter operations;
  • royalties;
  • income from gambling;
  • rents etc.

You can find the full list on IRS official website. If there are compulsory 24% payments to be paid by payer, they can be withheld from this types of transactions. There are also the ones that are not a subject to backup withholding. They’re the following:

  • canceled debts;
  • real estate;
  • unemployment compensation;
  • income tax refunds;
  • distribution from retirement account;
  • long term care benefits etc.

A complete list of payments can be found on IRS site. Check it out, if the transaction you’re searching for wasn’t mentioned above.

How can I stop backup withholding?

The first thing to say is that you’d better do everything correctly from the beginning, so that you won’t be a subject to it at all. Still, if such a thing happens, the only way is to remove the reason why you’ve received the mentioned status. For example, you can send a new form with corrected data, in case the TIN was wrong or missing. How to file the document? Send it to the requester using secure channels like protected email or trustworthy post service.