New Tax Law Sneaks in Change in Backup Withholding Rate

Gerry Nelligan
January 12, 2018

The newly implemented Tax Cuts and Jobs Act, better known as the new tax law, dropped the backup withholding rate for payments reported on form 1099 from 28 percent to 24 percent effective Jan. 1, although many organizations might not have noticed.

The IRS announced the withholding adjustment in Notice 1036 in early January. The change, however, was not obvious. The IRS itself still lists the 28 percent figure in its guidance about backup withholding on its website (as of Jan. 12).

But the amount of backup withholding is indexed to tax rates, specifically the fourth-lowest tax rate for single individuals. That used to be 28 percent, but under the new law, it’s 24. Therefore, the new withholding rate is also 24 percent.

Shift in Withholding Amount

The somewhat hidden change means that 1099 filers will need to adjust backup withholding percentages in the systems they use to manage tax information. The IRS says employers should start using the new withholding rate as soon as possible and no later than Feb. 15.

As a reminder, backup withholding kicks in under several scenarios involving 1099s, generally when there is a name-TIN mismatch in a file. The IRS website specifically says:

You may be subject to backup withholding and the payer must withhold when:

  • You don’t give the payer your TIN in the required manner.
  • The IRS notifies the payer that the TIN you gave is incorrect.
  • The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 120-day period.
  • You fail to certify that you’re not subject to backup withholding for underreporting of interest and dividends.

Take Action

Sovos delivers value by keeping organizations up to date on the latest changes in 1099 regulations. Find out more.

 

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Gerry Nelligan

Gerry Nelligan is a Regulatory Analysis Supervisor at Sovos, leading a team of counsels covering information reporting, including 10-Series IRS reporting, Affordable Care Act (ACA) reporting and Automatic Exchange of Information (AEOI). Gerry received his J.D. from Suffolk University Law School and his B.A. from Providence College. He is a licensed attorney in the state of Massachusetts.
Share this post

North America Tax Information Reporting
March 22, 2024
Market Conduct Annual Statement Reminders and More

On the second Wednesday of each month, Sovos experts host a 30-minute webinar, Water Cooler Wednesday, to share the latest updates on statutory filings. In March, Sarah Stubbs shared information about the many filings due after March 1, from Market Conduct Annual Statements to health supplements for P&C and life insurers writing A&H businesses and […]

North America ShipCompliant
March 21, 2024
How Producers Can Build a DtC Shipping Market

Direct-to-consumer (DtC) shipping has become one of the leading sales models for businesses of all sizes and in all markets. The idea of connecting directly with consumers is notably attractive, as it helps brands develop a personal relationship and avoid costly distribution chains. Yet, for all its popularity, DtC is often a hard concept to […]

North America ShipCompliant
March 20, 2024
Key Findings from the 2024 DtC Beer Shipping Report

This March, Sovos ShipCompliant released the fourth annual Direct-to-Consumer Beer Shipping Report in partnership with the Brewers Association. The DtC beer shipping report features exclusive insights on the regulatory state of the direct-to-consumer (DtC) channel, Brewers Association’s perspective and key data from a consumer preferences survey. Let’s take a deeper dive into some of the […]

March 20, 2024
As the World Gets Smaller, Think Bigger About Global Tax Compliance

For the past few weeks back, my colleagues and I have been talking a lot about the importance of a global strategy when it comes to addressing today’s modern tax environments. On the heels of Sovos introducing the Sovos Compliance Cloud, many in our company’s leadership team have blogged about related topics and the critical […]

North America ShipCompliant
March 12, 2024
Florida HR 583 Set to Uncork Larger Format Wine Bottles

This bill was signed into law on March 28, 2024 and takes effect July 1, 2024. Florida wine lovers could soon enjoy a bigger selection of bottles based on a recent bill passed by the state’s legislature (HR 583) that would remove the existing cap on wine bottle sizes. What is Florida’s HR 583 bill? […]