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When should I withhold taxes from contractor payments?

Learn when and how you might need to set aside federal withholding for contractors.

When you set up and track contractors for 1099s in QuickBooks, you may need to withhold federal backup withholding. Here's more info.

What is backup withholding?

Federal backup withholding is when the IRS determines that payments to a vendor or contractor are subject to Federal Income Tax at a rate of 24% for reportable payments.

A contractor can claim they are exempt from backup withholding when they complete the W-9. Follow the IRS guidelines in Instructions for the Requester of Form W-9 for more information.

When do I need to set up federal withholding for contractors?

  • You must withhold on certain payments if you did not get a TIN (Tax Identification Number) from your vendor.
    Note: If you don’t have one already, we recommend having your contractors fill out a W-9.
  • You received an invalid TIN from your vendor.
    Note: If you are not sure if the TIN is valid, the IRS website offers TIN matching e-services for certain payers to validate name and TIN combinations.

If you do not collect backup withholding from affected payees as required, you could be liable for the amounts. For additional information on backup withholding see IRS publication 1281.

How do I do backup withholding?

When you pay a contractor in QuickBooks Online or QuickBooks Desktop, you can add a line/expense to the check to account for the federal backup withholding. The amount must be entered as a negative amount to reduce the total pay to the vendor.

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