28% Withholding

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February 21, 2014:
Earlier this year a bunch of people got a nasty surprise, and learned that 28% of their money won't be available until 2014. A series of new rules for January 2013 means that some people who process credit cards could end up paying 28% for backup withholding if their TIN numbers do not match up with what the IRS has on file.

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2013 Rates:

2013 Rates for backup withholding can be steep. For example, if you process transactions through a credit card machine, and are not in compliance, then you will see twenty eight percent of your gross receipts (plus your other regular fees) taken out of each and every deposit. Since many companies operate on narrow margins, this kind of penalty can kill a company in the space of a few weeks. Note that you don't get your money back until the next tax year, after deductions, so no matter how much you needed that money right now, it is effectively imprisoned until the next tax year.

Are You Subject to Backup Withholding in 2013?

Tax Software Often Erroneously Says You're Either Exempt or Required

Backup WithholdingMost people find out about backup withholding when they are given a notice from a payment source, like a bank or credit card processing company, that they are not going to see the entire payment that they are owed. This could be because the company does not have a W9 form on file, or because the Taxpayer Identification Number at the IRS does not match up with the one that the paying company is showing. In multiple cases, simple transcription errors may mean that the Internal Revenue Service does not have your proper company name lined up with the EIN number that was assigned to your business when it was originally registered. Many businesses may leave out the "Corp" or "LLC" designation from their business name when applying for a merchant account or affiliate relationship, and as a result payments are dinged with a penalty.

Some common backup withholding classes can include dividents, rent, interest allocations, and royalties from intellectual property or mineral rights. There are cases where there is always backup withholding, especially where corporate officers may receive multiple dividends or payments, and in this case the money taken out is very similar to salary deductions. Similarly, investment income may also be subject to withholding. The best way to prevent backup withholding, if you can, is to ensure that you send a W9 form to anyone that is going to be sending payments to you. For example, if you do affiliate marketing for websites and services, then a W9 whould be on file. Anyone that you invoice should have your W-9 as well. If you aren't subject to a hold on payments from bonds or stock transactions, your broker should be aware of this in order to prevent issues. Note that pension payments, and regular wages, should never be subject to this classification of withholding, but contractors often find themselves on the other side of the coin because they aren't employees and get paid in commissions or fees. Red flags for the IRS, which may impose withholding, include under reported income or a history of mistakes on tax forms.

Furthermore, states like to get in on the action when the Federal Government says you are subject to withholding. For example, California will hit you with a 7% tax.

As a final note, people often get angry at the "messenger" when they are told that their money is being withheld. Financial institutions and other firms are required by US law to hold back the funds, and are subject to very steep fines if they fail to do so. These companies will operate in their own interest, and hang on to whatever funds are dictated by the IRS.

Notes and Special Information

Special note: For definitive rules on back up withholding for the year 2013, consult with the IRS website or your tax professional. There are so many ways to qualify for, and be exempt from, this particular circumstance that it would be impossible for our site to tell you if you can breahte easy or you have to send a chunk of your income to the IRS every month.