Backup withholding
Backup withholding is federal income tax a payer is required to hold back, currently at 24 percent, when a payee has not furnished a valid taxpayer identification number (TIN) or the IRS has notified the payer to withhold. It applies to reportable payments such as rents and nonemployee compensation (IRC section 3406).
When it applies
- The payee has not returned a signed W-9 with a valid TIN.
- The TIN provided is obviously incorrect or fails IRS matching.
- The IRS has sent a "C" notice directing backup withholding on the account.
Who is responsible
The payer is the withholding agent. If a property manager pays an owner or a vendor without a valid TIN on file, the manager is expected to withhold 24 percent, remit it to the IRS, and report it in box 4 of the 1099. Skipping it can leave the payer liable for the tax.
In a connected system this happens at the moment money moves rather than at year-end. AXYS carves the withholding out of the payout as the distribution runs and holds it as a tracked liability, so the amount is set aside before the money leaves.
How does a payee stop backup withholding?
By providing a correct, signed W-9 with a valid TIN, or by resolving the IRS notice that triggered it. Once a valid TIN is on file, withholding generally stops going forward.
Where is backup withholding reported?
In box 4 (federal income tax withheld) of the 1099-NEC or 1099-MISC, and remitted to the IRS on Form 945.
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