Overview
When you have contractors that worked for your business, you need to issue a 1099 when paying them more than $600. However, as the business owner, you can be liable for their tax.
Why Backup Withholding Applies
When contractors do not have a taxpayer ID number, such as a Social Security Number (SSN) or ITIN, they are subject to backup withholding.
Current Backup Withholding Rate
- The current backup withholding tax rate is 24%.
- You must withhold and remit this percentage for these taxpayers to the IRS by filing Form 945.
This is how the IRS ensures that contractors pay their taxes. When contractors file their tax returns, they will receive a refund of any excess tax withheld.
Consequences of Not Withholding
If you fail to withhold the 24% for your contractors, you will be liable for the amount. This liability will appear on your business account as a Trust Fund Recovery Penalty.
Important Note on Penalty Abatement
- The regular penalty abatement Form 843 will likely not work in this case.
Corrective Forms to Reduce Penalty
The only way to reduce this liability is by filing the following forms:
- Form 945-X
- Form 4669
- Form 4670
These forms demonstrate that some of your contractors filed their Schedule C returns and paid their tax.
As a result:
- You will no longer be liable for the 24% withholding for these contractors.
- Your penalty will decrease accordingly.
Frequently Asked Questions
When do I need to withhold backup withholding for contractors?
You must withhold backup withholding when a contractor fails to provide a taxpayer identification number, such as a Social Security Number (SSN) or ITIN. This ensures the IRS collects the appropriate tax if the contractor doesn’t report it.
What is the current backup withholding rate?
The current rate for backup withholding is 24%. This amount must be withheld from payments to contractors without valid taxpayer identification and remitted to the IRS using Form 945.
What happens if I forget to withhold the 24%?
If you fail to withhold the required 24%, your business becomes liable for that amount. The IRS may assess a Trust Fund Recovery Penalty against your business for noncompliance.
Can I reduce or avoid the Trust Fund Recovery Penalty?
You cannot use Form 843 to abate this penalty. However, you may reduce your liability by filing Forms 945-X, 4669, and 4670 to show that your contractors filed and paid their taxes independently.
What do Forms 945-X, 4669, and 4670 do?
These forms provide evidence to the IRS that certain contractors paid their own tax obligations. If accepted, they can reduce or eliminate the 24% withholding liability for those specific contractors.