What is Backup Withholding?

Backup withholding is a flat 28% tax rate that you may be required to withhold from your non-employees. If you are required to collect backup withholdings, you will be required to make timely deposits through the Electronic Federal Payment System (EFTPS). Using the EFTPS requires registration which can take several weeks to complete.

There are three situations in which you will be required to collect backup withholdings from your non-employees:

  • The non-employee did not furnish you with a tax identification number prior to you issuing payment;
  • The IRS informs you that the non-employee’s tax identification number is incorrect; or
  • The IRS informs you that the non-employee owes back taxes and you therefore need to collect backup withholding.

Backup withholding can apply to most 1099 payment types.