You might be subject to estimated tax payments or backup withholding.
Estimated Tax Payments
Most income you receive has taxes withheld from it. However, no taxes are withheld from certain income, though you must still pay taxes on the income. And you're required to pay the taxes as you earn or receive the income.
Income you might receive that have no taxes withheld includes:
Income from rents and royalties
Income from partnerships and S corporations
Alimony you receive
Prizes you win
You must make estimated payments to the IRS for taxes you expect to owe on this income. You might have some taxes withheld on this income. If so, you must make estimated payments if the difference between what you expect to owe and the amount withheld equals $1,000 or more.
To learn more, see the Estimated Tax (Form 1040ES) tax tip.
Banks, mutual funds, and brokerages usually don’t withhold taxes on income they distribute to or reinvest for you. However, these institutions might withhold taxes in certain situations. This type of withholding is called backup withholding. If this occurs, the Form 1099 you receive will report the amount withheld. The forms you receive might be:
Financial institutions are required to withhold taxes in these situations:
You didn't complete Form W-9: Request for Taxpayer Identification Number. You usually need to complete this form when you open an account. This is so the financial institution has your taxpayer identification number. Ex: Your Social Security number (SSN)
You didn't verify that your identification number is correct. You should verify this number when you complete Form W-9.
The IRS notifies the financial institution that the SSN on the Form 1099 is incorrect.
The financial institution receives a notice from the IRS requiring them to withhold taxes on the reported income. This happens:
When you fail to report all interest or dividends you received on a previous return
After the IRS has mailed you 4 notices over a 210-day (or more) period
You failed, when required, to verify you weren't subject to backup withholding.
If the institution is required to withhold taxes, it will withhold taxes at a 28% rate. When you complete your return, report this amount as taxes paid so you don't pay taxes twice on the same income.