Source: https://www.davidglenncpa.com/1099s-and-backup-withholding/
Timestamp: 2020-08-14 16:30:46
Document Index: 703304377

Matched Legal Cases: ['§6041', '§3406', '§3406', '§3406', '§6041', '§3406', '§6041', '§3406', '§3406', '§31', '§3402', '§3403']

1099s and Backup Withholding - David Glenn, CPA
§6041A creates a requirement for taxpayers engaged in a trade or business to issue a statement to people they pay $600 or more during the tax year for services. This statement is also filed with the IRS and is called Form 1099-MISC (1099). There are penalties for failing to issue and file 1099s which can add up quickly if there is a large number of unfiled 1099s.
What is lesser known, and potentially more costly, is the requirement for backup withholding. §3406 requires a payee to withhold 28% of any “reportable payment” (defined later) if any one of these conditions are met –
The payee fails to furnish his TIN to the payor in the manner required
The Secretary notifies the payor that the TIN furnished by the payee is incorrect
There has been a notified payee underreporting described in subsection (c)
There has been a payee certification failure described in subsection
Reportable payment is defined in §3406(b)(2) and (b)(3) and references nine other code sections that require payment reporting to the IRS. Among these nine, found in §3406(b)(3)(B), is §6041A. Payments made in a trade or business for services that total $600 or more during the year are “reportable payments” under §3406 and subject to backup withholding provisions.
This means that if a service vendor does not provide their TIN (usually on Form W-9), the payor is required to withhold 28% of the payment and remit it to the US Treasury. The withholding is reported to the vendor on the 1099-MISC and the vendor can claim a credit for withholding on their tax return.
Interestingly enough, §6041(c) requires the payee to furnish the payor their name, address, and TIN “upon demand”.
What happens if the payee/vendor fails to provide their TIN to the payor? §3406(h)(10) provides that the same rules applicable to withholding on payments made by employers to employees apply to the backup withholding requirements under §3406. §31.3406(h)-2(g) also provides that “A payor is subject to the same civil and criminal penalties for failing to impose withholding under section 3406 as an employer who fails to withhold on a payment of wages.”
So what are the rules for employer withholding? §3402 requires employers to withhold tax from wages paid to employees. §3403 says “The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter…” This means that the payor is liable for the payment of tax that is required to be withheld from payments to the payee, even if no withholding occurred.
If backup withholding was required but didn’t happen, the IRS can (and does) asses the required amount of backup withholding on the payor. Depending on the amount of payments, this could exceed any penalties for non- or late-filing of 1099s.
The best protection against the assessment of backup withholding is to require completed W-9s. If the payee won’t comply, begin withholding 28% of the payments until a completed W-9 is obtained.