What Are These IRS Backup Withholding Notices? What Do I Do When I Receive Them?

Question: What Are These IRS Backup Withholding Notices? What Do I Do When I Receive Them?

Backup withholding is income tax withholding required for non-employees and other transactions. Employers are not required to withhold income taxes from non-employees unless the individual's taxpayer ID number cannot be verified. Stated differently, employers must withhold income taxes from non-employees if the non-employee's taxpayer ID number cannot be verified. In this case, you will receive a notice from the IRS. This article discusses these notices and explains what you must do when you receive them.

Answer:

What Is a "B" Notice? What Must I Send This Notice?
A "B" notice is a backup withholding notice IRS stating that the non-employee's taxpayer ID number is either missing or incorrect. Send this notice when you receive notice from the IRS that the taxpayer ID is missing or incorrect. When you receive the first IRS notice, you must:

1. Immediately start withholding taxes at the rate of 28% from that non-employee's pay, no later than 30 days after you receive the notice
   
2. Send a copy of the "B" notice to the individual.
   
3. Send the individual a W-9 form and request that it be completed and returned to you to send to the IRS.

If you cannot find the taxpayer, the taxpayer refuses to complete Form W-9, or the "B" notice is returned as undeliverable, you must immediately start backup withholding (28% tax rate) from the payments made to that person.

What is a Second "B" Notice? When Do I Send This Notice?
The second B notice tells the individual taxpayer to contact the IRS or Social Security Administration to obtain a correct Taxpayer ID Number. You as the employer are not required to do anything except continue to withhold income tax from the taxpayer's payments.

What Is a "C" Notice? What Must I Do When I Receive This Notice?
A "C" notice is a backup withholding notice from the IRS stating that the non-employee has understated income and is subject to backup withholding. When you receive the first "C" notice, you must:

1. Immediately start withholding taxes at the rate of 28% from that non-employee's pay, no later than 30 days after you receive the notice
   
2. Send or give a copy of the "C" notice to the individual.

If you receive a "B" notice or "C" notice, you must continue withholding until you are informed by the IRS to stop withholding.

When in doubt as to what to do, always start backup withholding on payment made to an individual (at the rate of 28%). Let the taxpayer sort out the taxpayer ID problem with the IRS.

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