Backup Withholding

United States Tax Concept of Backup Withholding

Backup Withholding is income tax that is withheld from investment income such as interest and dividends to ensure that the tax is collected. Banks and other financial institutions are required to report to the IRS all interest and dividends paid along with your social security number or taxpayer identification number. If they do not have adequate reporting information for you they are required to withhold 31 percent of your investment income. The IRS may also require the bank or financial institution to withhold tax if the IRS determines you have underreported your investment income in a prior year. Your Form 1099-INT or Form 1099-DIV will show any backup withholding as “Federal income tax withheld.”