What is IRS Backup Withholding?
Similar to income tax withholding on a paycheck, backup withholding is imposed by the IRS on certain types of investments and income. The Housing and Recovery Act of 2008 included Amendment 6050W, Merchant Tax Reporting. This Amendment requires all merchant accounts providers to collect and verify TINs and report annual gross payments processed by debit or credit cards using Form 1099-K (Payment Card and Third Party Network Transactions) to the IRS and merchants.
Who is affected?
Merchants who have not provided valid Taxpayer Identification Number (TIN), address, and name match to their merchant accounts provider.
Why is this important?
Merchants with mismatched TINs could risk an automatic withholding of 28% of their merchant account deposits. Additionally, some states may impose their own separate withholding penalty. This could result in a merchant not having access to the withheld funds until the following year when they file a tax return.
When will the IRS begin withholding funds?
The deadline to impose the penalty for most major credit cards was initially required to begin in 2012; however, the IRS postponed it until October 2014. If a merchant’s TIN was not valid by this time, they may start to see revenue withheld. Any merchant who receives a “B” notice initiated by the IRS will have 30 days to respond prior to mandatory IRS-directed withholding of a minimum of 28% of gross sales. Some states have increased the withholding amount.
Where can a merchant find out if they have a TIN mismatch?
A merchant’s name and TIN should match those used on the tax return in order to match the IRS database. The merchant accounts provider should have been sending notifications via mail, email, phone, or fax, in addition to special statement messages if a merchant is in risk of having their money withheld. Many processors also offer an online merchant portal where merchants can go to verify this information.
How can a merchant prevent this withholding?
- Verify that the accurate TIN, address, and name have been reported to the IRS. Even the smallest difference like an “&” versus an “and” could have an impact.
- Update your tax information. Complete a W-9 form and return it to your merchant accounts provider as soon as possible.
- Review bookkeeping and accounting practices. Having the proper systems in place will assist with accurate reconciliation information that will help to eliminate any discrepancies.
- Visit the IRS website and learn more about the IRS 6050W regulation and Form 1099-K.
- Contact merchant accounts provider with questions or concerns.