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Received a Backup Withholding Notice? Here’s What to Do

Received a Backup Withholding Notice? Here's What to Do

For small fledgling business owners, balancing daily operations and other matters such as payroll processing and tax filing is hard enough, and with a notice on top, this can quickly turn into a nightmare.

As one of the leading tax accounting firms in Texas, we’ve compiled a guide so you will know where to start when you receive a notice, particularly backup withholding notices.

What’s Backup Withholding?
This refers to income tax withholding that is taken from certain forms of payments and transactions, such as fees for accounting and bookkeeping services and professional fees to the designers and lawyers, etc. and is required for nonemployees, such as freelancers and independent contractors.

Why Do I Have a Notice?
For nonemployees, income taxes need not be withheld as you would for an employee, you only had to have a W-9 form signed by him/her, which states his/her name, address, and taxpayer ID number for a filing. However, when this nonemployee’s taxpayer ID cannot be verified/incorrect or is missing, a backup withholding notice is sent by the IRS to inform you. The following are the types of notices you can expect and what you can do:

  • B-Notice

    This informs of an incorrect or missing taxpayer ID number

    What to Do:

    Let the nonemployee sign a new W-9 form. But if the ID proves to be missing or if the nonemployee doesn’t respond or refuses to complete it, start withholding taxes at 24%.

  • Second B-Notice

    This notice informs the nonemployee to contact the IRS for a new ID number.

    What to Do:

    Continue withholding taxes at 24% until you receive a new W-9 form.

  • C-Notice

    This notice informs of the nonemployee’s understated income.

    What to Do:

    Continue withholding taxes at 24% until you’re informed by the IRS to stop and give a C-Notice copy to the nonemployee.

Need help? Contact us at KF Tax & Accounting, P.C., a provider of tax services in Round Rock, Texas for assistance.

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