Who is exempt from backup withholding? Most taxpayers may be surprised to know that they fall into this category, according to the IRS regulations. Unless otherwise notified in writing from the IRS, taxpayers do not have to worry about backup withholdings taken out of their hard-earned paychecks. Certain groups are exempt from backup withholdings, and, for the most part, individuals and sole proprietors are exempt as long as they meet specific conditions when reporting tax information.
What is backup withholding?
The backup withholding is a means for the IRS to collect taxes owed from individuals who have failed to provide certain information to the agency. For taxpayers who have failed to report income like interest or dividends from investments accurately, the IRS may require the payer to withhold a set amount before sending the balance on to the taxpayer. Often the IRS uses backup withholdings for people who have failed to report their taxpayer identification numbers or have reported them incorrectly.
When are backup withholdings used?
The five most common reasons that the IRS will implement backup withholdings on a taxpayer include:
1. The IRS asked a taxpayer to certify his TIN upon request and the taxpayer has not done so.
2. The IRS notified the taxpayer that the TIN is incorrect or in use by someone else.
3. The taxpayer failed to furnish a TIN at all when filling out paperwork.
4. The IRS discovered that the taxpayer did not report all income from dividends and interest, and it resulted in a severe underreporting of taxes.
5. The taxpayer has falsely reported that he is exempt from backup withholding.
Who is exempt?
Generally, an individual taxpayer is open to backup withholdings if the IRS has the appropriate reason to invoke it. Tax-exempt organizations, the federal government, a foreign government or international organizations are generally exempt permanently from backup withholdings. Other exempt status groups are a state government or territorial government, banks, trust funds, corporations or commodities dealers. Non-resident aliens are also exempt from backup withholdings.
How is FICA calculated? The money generated by this tax goes to Social Security and Medicare, but each one gets a different percentage of your earnings.
Wondering how does salary work? New salaried employees should check with their companies about specifics because there are pros and cons to salaried positions.