Backup Withholding

Backup Withholding is a mechanism the IRS uses to collect tax from payees whose taxpayer information (TIN) is missing, incomplete, or doesn't match IRS records. When backup withholding applies, the payer (for example, a general contractor paying a subcontractor) must withhold 24% of the gross payment and remit it to the IRS on behalf of the payee. The rule kicks in when a subcontractor fails to provide a valid W-9, provides a wrong TIN, or has been flagged by the IRS for prior underreporting. The easiest way to avoid backup withholding is to collect a valid W-9 from every sub before issuing the first payment.