Backup Withholding
Income tax withholding is money withheld from your income and paid to the government to be applied against your annual income tax bill. That's withholding, right?
So then what is backup withholding? Is it extra money withheld in case the other money withheld wasn't enough? Nope. If a taxpayer didn't provide the correct Tax Identification Number, or did not report dividend, interest, or patronage dividend income to the IRS, they may be subject to backup withholding. Things like rents, royalty payments, profits, commissions, fees, and other payment for work as an independent contractor may also trigger backup withholding.
"May be subject to" implies the taxpayer did it once, the IRS noticed it, and they requested a correction so the taxpayer is on double-secret probation.
FYI, a "patronage dividend" is essentially a refund issued to those who purchase goods or services from a cooperative. Example: Farmer's Co-op's are big in the midwest.
Related or Semi-related Video
Finance: What is Tax Loss Carry-Forward?328 Views
finance a la shmoop what is a tax loss carry forward
all right well feel bad about losing money in your business last year
well this law will help make you feel a whole lot better you had been going [guy sinking in bath]
along swimmingly making ten million bucks a year in your hot tub pimp out
biz where you are the premier provider of turbo Jets neon lights spa caddies [fancy hot tub]
massaging floor inserts and literal wet bars but then Kanye launched a competing [alcoholic beverages]
business called hot and wet by Kanye and the next year well you lost six million [Hot and Wet by Kanye building]
bucks well on your 10 million of taxable profits in a year you had been paying 30
percent tax or 3 million bucks in taxes to show net income or earnings of 7
million dollars well you lost 6 million dollars last year so you paid no tax and
no the government doesn't rebate you 30% in taxes like they don't write you a
check for 30% of 6 million or 1.8 million years that you lose money
running your business but they do allow you to carry forward that loss into the
next year or the next or the next usually up to 7 years total in most
cases so that tax loss of 6 million bucks then comes in handy the following
year when Kanye's hot tubs are found to be administering second-degree burns to [Hot and Wet news paper]
its buyers and you once again make 10 million dollars in taxable profits only
this time you have 6 million dollars of tax loss carry forward that gets first
subtracted from the 10 million before you have to even think about taxes so in
this case you pay taxes on just 4 million dollars or 30% of 4 million or
just 1.2 million in taxes to net 2.8 million in net income essentially the
government splits your losses and lets you take the taxable part of losses into
the future so that the lows are not so low and well as far as Kanye is
concerned the highs are not so high [Kanye in court]
Up Next
What is a 1099? A 1099 is a tax form that comes from an employer. It states how much income an employee has made and the employee is able to use th...
Time to learn about the IRS. On the bright side, it'll be less painful than an STD, less emotionally manipulating than PMS, and less time-consuming...
Tax brackets set the incremental rates at which the financially more successful are taxed.
A tax haven is a nation that offers special tax incentives for corporations doing business there.