Small business owners are reminded that tax reform legislation lowered the backup withholding tax rate to 24 percent. In addition, the withholding rate that usually applies to bonuses and other supplemental wages was also lowered to 22 percent. As such, employers should have their employees check their withholding.
Backup withholding. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the backup withholding tax rate dropped from 28 percent to 24 percent. This new rate was effective on January 1, 2018.
Backup withholding applies in various situations, including when a taxpayer fails to supply their correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number (SSN), but in some instances, it can be an employer identification number (EIN), individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).
Backup withholding also applies (following notification by the IRS) where a taxpayer under-reported interest or dividend income on their federal income tax return. When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. This includes most payments reported on IRS Form 1099, such as interest, dividends, payments to independent contractors and payment card and third-party network transactions.
Payees may be subject to backup withholding if they:
- Fail to give a TIN,
- Give an incorrect TIN,
- Supply a TIN in an improper manner,
- Under-report interest or dividends on their income tax return, or
- Fail to certify that they’re not subject to backup withholding for under-reporting of interest and dividends.
To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the under-reported income and pay the amount owed, or file a missing return. Please call if you need more information about backup withholding.
Payers report any backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. Forms 945 are generally due to the IRS by January 31. Payers also show any backup withholding on information returns, such as Forms 1099, that they furnish to their payees and file with the IRS.
Bonuses and other supplemental wages. The TCJA also lowered the tax withholding rates to 22 percent. This rate normally applies to bonuses, back wages, payments for accumulated leave and other supplemental wages. In most cases, the new rate was effective on January 1, 2018. Please note that for payments exceeding $1 million, the rate is 37 percent.