Backup withholding is income tax withholding required from non-employee compensation when the payee fails to furnish the payer with a taxpayer identification number (TIN) or the payer is notified by the IRS that the payee’s TIN is incorrect.
Backup withholding can apply to most kinds of payments that are reported on Form 1099. These include:
interest payments (Form 1099-INT)
dividends (Form 1099-DIV)
patronage dividends, but only if at least half of the payment is money (Form 1099-PATR)
rents, profits, or other gains (Form 1099-MISC)
commissions, fees, or other payments for work done as an independent contractor (Form 1099-MISC)
payments by brokers (Form 1099-B)
payments by fishing boat operators, but only the part that is in money and represents a share of the catch proceeds (Form 1099-MISC)
royalty payments (Form 1099-MISC), and
gambling winnings (Form W-2G) in some cases
Paychex will produce Form 1099-MISC and Form 945.
CP2100 and CP2100A IRS notices inform the payer of backup withholding responsibility. They are accompanied by a list of missing, incorrect, and not currently issued payee TINs. Large volume filers (250 or more error documents) receive a CP2100; all other filers receive a CP2100A.
Currently, the payer is required to withhold at a rate of 28% for federal backup withholding.
Backup withholding is deposited using the Federal Tax Payment System (EFTPS). These types of deposits cannot be combined with deposits for Forms 941, 943, 944, or Form CT-1.
Form 945 is used to report backup withholding. Form 945 is a yearly tax return that is only required if the company has backup withholding within that specific year.
Visit the IRS Web site at www.irs.gov to determine if you are a monthly or semiweekly depositor or refer to IRS Publication 1281, Backup Withholding on Missing and Incorrect Names/TIN(s), for additional federal information.
Some states also accept or require backup withholding. Check specific state regulations for details.