Backup Withholding
Backup Withholding means:
the procedure used to ensure that federal income tax is paid on earnings even though the recipient cannot be identified by a Social Security number. Banks, brokers, and other entities report nonwage earnings paid out on U.S. Internal Revenue Service (IRS) Former Federal Tax Form (check here if the Form is current) (see if this Former Federal Tax Form (check here if the Form is current) is current here) 1099. When the Former Federal Tax Form (check here if the Form is current) cannot be filed because the taxpayer's Social Security number is unavailable, 31% of the interest, dividends, or fees is withheld by the payer and remitted to the federal government. Former IRC (check if this IRC provision is current here) §3405.
Example of Backup Withholding:
Learn more about tax examples, explanations and calculations here.
If interest earned on a bank account is $1,000 and there is no Social Security number on file for the account, the bank withholds $310. The taxpayer receives a Former Federal Tax Form (check here if the Form is current) 1099 showing the interest and tax withheld, which may be claimed when filing the Former Federal Tax Form (check here if the Form is current) 1040.
See the entries Income Tax and State Income Tax in the American Encyclopedia of Law.
See Dividend in the American Legal Encyclopedia and Dividend in the World Legal Encyclopedia.
See Tax Forms in the Encyclopedia.
Description and Definition of Backup Withholding
Backup Withholding is income tax that is withheld from investment income such as interest and dividends to ensure that the tax is collected. Banks and other financial institutions are required to report to the IRS all interest and dividends paid along with your social security number or taxpayer identification number. If they do not have adequate reporting information for you they are required to withhold 31 percent of your investment income. The IRS may also require the bank or financial institution to withhold tax if the IRS determines you have underreported your investment income in a prior year. Your Form 1099-INT or Form 1099-DIV will show any backup withholding as “Federal income tax withheld.”
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