Do I Have to Deduct Federal Withholding Tax for a 1099?

Clients and workplaces that utilize the services of others often provide them with an IRS Form 1099 for income earned during the tax year. Since the payor is not an employer, withholding federal income taxes seems unreasonable. However, before you pay a supplier of services, make certain that you do not have to withhold taxes for the IRS. There are situations when withholding is required.

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Significance

    An IRS Form 1099-MISC identifies those who receive rents, royalties and non-employee compensation of more than $600 for services during a tax year. Many kinds of 1099 forms are issued. For example, Form 1099-B is for securities transactions; 1099-DIV covers dividends and 1099-INT is for interest paid.

    Prior to utilizing services or making payments, the payor should ask for completion of a W-9 form. The W-9 provides the TIN or Tax Identification Number for those who file information returns with the IRS. The Form 1099 is an information return.

Identification

    When the payee completes the W-9 form, he provides a Tax Identification Number or Social Security number, along with a statement regarding backup withholding. The payee states under penalties of perjury that the TIN number is correct, that he is a U.S. citizen and that he is or is not subject to backup withholding.

Effects

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    If the payee is subject to backup withholding, you must deduct federal taxes from sums paid to the payee. If the payee TIN does not match the records of the IRS or if the IRS notifies you to deduct backup withholding, you will have to withhold taxes from the amounts paid. There are exceptions to these general rules. Few instances exist when you must deduct taxes for a payee with a 1099 information return. See the General Instructions for Certain Information Returns from the IRS for more information. Intricacies in the details require a review for your specific situation.

Amount

    If you must deduct withholding from a payee under a Form 1099 or similar form, the flat amount of 28 percent is the correct backup for withholding in 2010. Information returns have transmittal Form 1096 attached. If you find you must file a corrected Form 1099, complete the form with an X in the "Corrected" box and send with a new transmittal Form 1096 to the IRS at the Austin, TX or Kansas City, MO address, depending upon which office services your area.

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Notification

    Provide the payee with a statement of the information you provide to the IRS. For some 1099 forms (1099-A, 1099-B, 1099-C, etc.), you must include a telephone number for a person who can answer questions about the statement in keeping with the IRS requirements. For the 1099, "you are encouraged to furnish telephone numbers," says the Section M instructions from the IRS.

    The payee must report 1099 income to the IRS and pay taxes on the income as required.