2006-09-05 16:34:12 · 2 answers · asked by Anonymous in Business & Finance ➔ Taxes ➔ United States
Backup withholding is when your financial institution withholds income tax from your interest and dividends. Usually, no taxes are withheld from these payments. You are only subject to backup withholding if the IRS tells you that you are. I believe, this action would come from you not reporting this type of income in past years.
2006-09-05 18:26:15 · answer #1 · answered by Y Answerer 6 · 0⤊ 0⤋
Like Richard said, backup withholding is usually withheld by financial institutions. It is usually 20%.
For example, you make an early withdrawal from your 401(k) of $10,000. The check that you receive will only be for $8,000 because of the 20% backup withholding or $2,000. The 20% is used to cover the 10% penalty for the early withdrawal and the other 10% goes to cover income taxes. This way, you do not have to pay an extra $2,000 when it comes time to file your taxes.
2006-09-06 19:11:44 · answer #2 · answered by Steve 6 · 0⤊ 0⤋