TaxAlerts Tax Article
September 2014 | Written by: Karen Reed, EA
In August the IRS issued Notice 1430, “Don’t Get Caught in Backup Withholding.” The notice is a warning to all businesses, big and small, that if the name and taxpayer ID number provided to a payment card processor or third party settlement organization doesn’t matches IRS records, the payments received by the business will be subject to 28% withholding by the payment processor or settlement organization.
The situation arises when the IRS is unable to match a Form 1099-K with a specific taxpayer or business in its records. When this happens, the IRS requires the payment card processor or third party settlement organization to withhold 28% from each payment transaction until the situation is remedied.
Businesses that find themselves subject to backup withholding can rectify the problem by contacting their payment card processor or third party settlement organization and verifying that the information on file matches the name and taxpayer identification number on the business’s income tax return. Monies already withheld as withholdings are claimed when the income tax return is filed for that tax year. Notice 1430 also notes that funds withheld from partnerships and subchapter S corporations are refundable only by the partners and shareholders on their individual income tax returns and not by the partnership or S Corporation.