BACKUP WITHHOLDING Meaning and
Definition
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Backup withholding is a term used in taxation and refers to the practice of deducting a percentage of income tax from certain payments made to individuals or entities. This withholding serves as a safeguard for the government to ensure that taxes owed by the recipient are collected.
When a payer, such as an employer or a financial institution, makes a payment to a payee, such as an employee or a contractor, backup withholding may be required if the payee fails to provide the payer with their taxpayer identification number (TIN) or provides an incorrect TIN. The payer is responsible for withholding a portion of the payment and remitting it to the tax authorities on behalf of the payee.
Backup withholding is commonly applied to various forms of income, including wages, salaries, pensions, annuities, dividends, and interest. The current backup withholding rate in the United States is 24%. The withheld amount is then reported to the payee on Form 1099, which they can use to claim the withholding as a credit when filing their individual income tax return.
The objective of backup withholding is to prevent tax evasion by ensuring that individuals and entities comply with their tax obligations. It provides the government with a mechanism to collect taxes from those who may be non-compliant or attempting to provide inaccurate information. By enforcing backup withholding, tax authorities can maintain an efficient and effective tax system.
Etymology of BACKUP WITHHOLDING
The term "backup withholding" is a combination of two words: "backup" and "withholding".
- "Backup" refers to a form of support or protection in case something goes wrong. In this context, it represents an additional or secondary means of tax collection.
- "Withholding" refers to the act of deducting or withholding a portion of someone's income for tax purposes.
Therefore, "backup withholding" is a term that describes the practice of withholding a specific percentage of an individual's income or payment for federal tax purposes as a secondary method of tax collection, usually when the taxpayer has not provided their correct taxpayer identification number (TIN) or has underreported their income. This ensures that taxes are collected even if the taxpayer fails to fulfill their tax obligations voluntarily.
