Estimated Tax Payments and Backup Witholding

Some income can make you subject to estimated tax payments or backup withholding.

Estimated tax payments

Most income you receive has taxes withheld from it. However, with some income, no taxes are withheld — but you must still pay taxes on the income. You’re required to pay the taxes as you earn or receive the income.

Income that has no taxes withheld includes:

  • Self-employment income
  • Investment income
  • 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 these kinds of income. If you had some taxes withheld on this income, you might still owe some taxes. 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.

Backup withholding

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. There’s more than one type of 1099:

  • 1099-DIV
  • 1099-INT
  • 1099-B

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 four 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.

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