Tax

So why do we get backup withholding notices from the IRS?

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Late fall is generally the time of year the IRS sends out annual backup withholding notices referred to as a Notice CP-2100 or CP-2100A. The letter starts out, “This notice is to inform you of possible errors in the Forms 1099 you filed for the year shown above.” These notices are generated because the IRS cannot match up the TIN/name combination on the 1099s filed. The letter goes on to inform the recipient about steps required and the need to backup withholding at the rate of 28%.

There are a number of reasons why the IRS cannot match up the TIN number with the payee name. Some of the most common reasons are:

 

  1. The1099s are machine read by the IRS. Often times the numbers are misread. For instance, an “8” might be read as a “3,” or a “2” as a “7.” Check to make sure the TIN on the notice agrees to the 1099 remitted. If the TIN on the notice is not the TIN on the 1099, you are not required to take any action.
  2. A single member LLC who uses an Employer Identification Number for filing payroll returns but files income tax returns under his/her social security number.
  3. A sole proprietor who is engaging in business using a trade name. When preparing the 1099, the sole proprietor’s name should appear on the first line followed by the “doing business as,” or DBA, name. This error is corrected by issuing a new 1099 as originally submitted, entering the dollar amount as zero and marking the corrected box on the 1099. Then issue a second 1099 with the sole proprietor’s name on the first line followed by the DBA name. Include the dollar amount in the appropriate boxes.
  4. A misplaced dash. (Example SSN number filed as xx-xxxxxxx instead of xxx-xx-xxxx). Correct as described above in #3.

 

In the case of #1 and #2 above, if the name and TIN number agree to the 1099 remitted, the filer is required to send a B-notice to the payee along with a new W9. Both forms can be found on the IRS website at www.irs.gov. If the information on the new W9 differs from the information on the 1099 filed, the original 1099 should be corrected as described in #3. If, however, the information on the new W9 matches the 1099, the filer is not required to take further action but should keep both W9s on file to show the payee certified the TIN/name combination.

If the payee fails to complete and return the second W9, you should begin backup withholding immediately following the date indicated on the B-notice. Backup withholdings are deducted from all future payments at the rate of 28%. For example, a subcontractor is due $1,000. The payer would withhold $280 and forward payment to the payee for $720. When completing the current year’s 1099, the full $1,000 would be reported as income on the appropriate box and the $280 in backup withholding would be reported in Box 4 of the 1099.

All backup withholdings are reported to the IRS annually using Form 945.

ALERT! If your organization receives government notices related to changes in payroll filing requirements or changes in unemployment rates, please forward these to your payroll service as soon as possible. You are responsible for notifying your payroll service of any changes. Payroll services are not responsible for any penalties and interest imposed on you for failure to report changes to them in a timely manner.