With all of the new changes in W-2/1099 reporting and compliance, please be careful. For instance, another one that has slipped under the radar of many is the new backup withholding rate.

Internal Revenue Code (IRC) Section 6109(a)(1) provides that any payer required to file an information return must include the payee’s correct TIN. In addition, IRC 6109(a)(2) requires the payee to furnish their correct TIN to the payer (meaning to you). Furthermore, IRC Section 6109(a)(3) requires a payer (again meaning you) to request a payee’s TIN and include it in any returns filed with IRS. Finally, IRC Section 6721 provides a payer may be subject to a penalty for failure to file a complete and accurate information return, including a failure to include the correct payee TIN.

The problem posed by payee’s reluctant to divulge their name and taxpayer identification number (TIN) is a common one often leaving you scratching your head as to how best handle such a situation. It's actually quite simple: you backup withhold. IRC Section 3406(a)(1)(A) provides that reportable payments are subject to backup withholding if the payee does not provide a correct TIN to the payer. Meaning, the payer is required to withhold from the reportable payment to a US Person if the TIN is not provided at the time of the payment.

For over a decade that backup witholding rate on payments made to U.S. Persons has been 28 percent. However, under new changes in the law if your payee refuses to provide their TIN then the new backup withholding rate is 24% and not 28%. Please take note of this change as it has been in effect since January 1, 2018.