Business owners will need to address multiple types of tax issues, including withholding payroll taxes from employees’ incomes and paying these taxes to the IRS and the California Employment Development Department (EDD). These issues can become more complicated when a business hires independent contractors or when other types of payments are made. In general, payments that are reported on 1099 forms do not require a payer to withhold taxes. However, there are certain situations where the IRS may require backup withholding.
What Is Backup Withholding?
Form 1099 is an information return that lets the IRS know about certain types of payments made by a business. The recipients of these payments are expected to report and pay taxes on these payments. However if there are issues related to the reporting of payments, a payer may be required to withhold a certain percentage of these payments and pay these taxes to the IRS. The tax rate for backup withholding is 24 percent.
In most cases, backup withholding will be required because the recipient of payments failed to provide a correct taxpayer identification number (TIN). A TIN may include a person’s Social Security Number (SSN), an individual taxpayer identification number (ITIN), or an employer identification number (EIN). If a TIN is missing or incorrect, the IRS will notify the payer that they may be required to begin backup withholding for any payments made to the payee.
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