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.

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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.
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