In a recent announcement, the IRS reminded businesses about their compensation reporting requirements for independent contractors and other nonemployee workers. When a business hires an independent contractor, the employer is generally not responsible for withholding income taxes, Social Security, or Medicare taxes from their compensation. However, business taxpayers who pay nonemployee compensation of $600 or more per year are required to report these payments to the IRS. They do this by filing Form 1099-NEC, Nonemployee Compensation by January 31 of the year following the year in which the payments were made.

Back-up Withholding

Nonemployee compensation reportable on Form 1099-NEC is subject to backup withholding if a payee has not provided a Taxpayer Identification Number to the payer or the IRS notifies the payer that the payee provided a TIN that does not match their name in IRS records. A TIN can be one of the following numbers:
•    Social Security
•    Employer identification
•    Individual taxpayer identification
•    Adoption taxpayer identification

Backup withholding can apply to most kinds of payments reported on Forms 1099. The person or business paying the taxpayer doesn't generally withhold taxes from certain payments; however, there are situations when the payer is required to withhold a certain percentage of tax to make sure the IRS receives the tax due on this income. The payer's requirement to withhold taxes from payments not otherwise subject to withholding is known as backup withholding. The current backup withholding tax rate is 24%.

More information can be found in IRS Publication 15, Employer's Tax Guide, Circular E