What IS Back Up Withholding, Anyway?

Today TaxMama hears from Janet in Anaheim, CA who is perplexed.

“My husband’s business received a notice from the IRS. It said that a contractor’s taxpayer ID number on the 1099s we filed last year is incorrect. Now, IRS says I have to file a notice to the contractor within 15 days.

But, this guy was a subcontractor hired by my husband back in January last year. He was a local who did a dry wall job up in Sacramento that lasted about 2 weeks.

So, my question is how do I do ‘backup withholding’ on him?
He’s not an employee or a contractor we’ll ever need again. I’m sure we are not the first small business to encounter this situation. Can you explain in layman’s terms?”

Well Janet, that’s a very good question.

If the guy were still working for you, you would need to give him the notice, and then hold back part of the money you pay him.

Since he’s not, just file the information in his vendor file.

If you ever hire him again, call IRS and ask if that notice is still in effect.

Meanwhile, you don’t need to reply to IRS.

You are getting that notice because you sent a 1099 out with his income and he didn’t report the income on his tax return, or he hasn’t filed.
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Incidentally, if he were working for you, and you got the notice, you’d need to give him a copy of it.
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He has about 20 days from the date of the notice to contact IRS and persuade them to lift that withholding order. If he does, fine, you’ll get a fax from IRS. If he doesn’t, you’d have to hold on to his money and send it off to the government.

And remember, you’ll find answers to lots of business and other tax information, free. Where? At TaxMama.com

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