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Need Some Deductions for 2011?

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Updated for 2011

Tax Identification Numbers

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Backup Withholding Rate for 2011 - 28%

When you hire an independent contractor to perform services be sure to get his/her taxpayer identification number (TIN) before you make any payments.

Persons who do not provide you with their taxpayer identification number are subject to backup withholding (federal income taxes) on payments required to be reported on Form 1099-MISC.

The backup withholding rate for 2011 is 28%.

For example, if you hire an independent contractor and he/she does not provide you with his/her tax identification number and you pay this person $600 or more for the year, such payments are required to be reported on Form 1099-MISCC (instructions to Form 1099-MISC) and are subject to backup withholding on the gross amount paid. You turn over the tax withheld to the U.S. Treasury.

Example:

You pay an independent contractor $650 to paint your office
No taxpayer identification number is provided to you

Result:

You report the Gross Amount paid, $650, on Form 1099-MISC.
You withhold federal income taxes of $182 (28% x $650) and enter the amount in box 4 of Form 1099-MISC. This is called backup withholding.

Installments:

If you know you're going to pay $600 or more to an independent contractor and if you're going to be making installments on the work done until it is finished, and if he/she doesn't provide you with his/her taxpayer identification number (TIN), then withhold 28% of each installment.

If you end up getting the person's taxpayer identification number before making your final payment, then no backup withholding is required and you can pay any amounts previous withheld.

How to Request a Taxpayer Identification Number

To request a taxpayer identification number, have the independent contractor complete Form W-9, Request for Taxpayer Identification Number and Certification.

Form W-9:

If you expect to pay a independent contractor (IC) $600 or more in a tax year, give the IC Form W-9 to complete as soon as possible.

If Form W-9 is not returned to you by the time you're ready to pay him/her, you must deduct 28% from the gross amount to be paid to the IC (this is backup withholding). Cut a check for the net amount.

On Form 1099-MISC, you report the gross amount, not the net amount you cut the check for to pay the IC. In addition, the amount of federal tax withheld (the backup withholding) is also reported on Form 1099-MISC.