Hiring Contractors? Don’t Overlook Backup Withholding Rules!

When your business hires independent contractors, you’re generally not responsible for withholding tax from their compensation. But there are circumstances in which you should withhold a certain percentage of tax (backup withholding) to help ensure the IRS receives it. The most common reason is that a contractor has failed to provide a valid Taxpayer Identification Number, such as a Social Security number. In such cases, you should withhold 24% of the payment and deposit that amount with the IRS using Form 945. At the end of the year, provide the contractor with a Form 1099 that reports the amount you paid and the amount you withheld.