As you no doubt know, many payments that are reported on Form 1099 can be subject to backup withholding, including interest and dividend payments, rents, profits, and commissions. Backup withholding comes into play under certain circumstances, such as when the payee neglects to provide a taxpayer identification number (TIN) or the IRS sends the payer a notice that the payee has furnished an incorrect TIN, the IRS notes.
A payer that fails to carry out backup withholding when it’s required may itself be liable for any amount that should have been withheld, according to information from the accounting firm, Deloitte.
What’s received less attention is the fact that the current backup withholding rate of 28 percent is scheduled to expire at the end of this year. According to information from the IRS, it will revert to 31 percent. That’s because the request to extend EGTRRA, or the Economic Growth and Tax Relief Reconciliation Act of 2001, does not include keeping the backup withholding rate at 28 percent. So, the rate will revert to 31 percent, or the level that was in effect before EGTRRA.
Although the change is still six months out, AP professionals will want to begin identifying the changes to their systems and procedures that they’ll need to make in order to shift to the new rate.