Backup withholding is the provisional withholding of a percentage of your income from investments, such as dividends or interest, to cover any income tax that you might owe. Normally your investment income is not subject to income tax withholding, like your salaries and wages are. But there are situations when the payers of your investment income are required to withhold taxes to ensure that income tax is collected on the income. This happens, for example, when the payer does not have certain information from you.
When backup withholding is required, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold a percentage (28%, for example) of your income and pay it into the U.S. Treasury as income tax in your name.
When is Backup Withholding Required?
Backup withholding of income taxes will be required in the following cases:
When you did not give your social security number or employer identification number to the payer of your dividends, interest, or other investment income.
When you have given the payer an incorrect social security number or employer identification number and the Internal Revenue Service (IRS) notifies the payer of the incorrect number.
When you have under-reported interest or dividends on your income tax return and the IRS notifies the payer that you are subject to backup withholding because of this under-reporting.
When you are required to certify the reasons for which you are not subject to backup withholding, but you did not make this certification.