Backup Withholding

AAA

DEFINITION of 'Backup Withholding'

Tax that is levied on investment income, at an established tax rate, as the investor withdraws it. Backup withholding helps to ensure that government tax-collecting agencies (such as the IRS or Canada Revenue Agency) will be able to receive income taxes owed to them from investors' earnings. Backup withholding may be applied when an investor has not met rules regarding taxpayer identification numbers (TIN). At the time the investor withdraws his or her investment income, the amount mandated by the backup withholding tax is remitted to the government, providing the tax-collecting body with the required funds immediately, but leaving the investor with less short-term cash flow.

INVESTOPEDIA EXPLAINS 'Backup Withholding'

Investors commonly earn income - for example, interest payments, dividends, capital gains - from assets in which they have invested. While this income is taxable at the time it is received, the taxes owed on any calendar year's worth of investment income only come due once every year, during tax season.

Thus, an investor could potentially spend all of his investment income before his annual income taxes come due, leaving him unable to pay taxes, and leaving the IRS with the difficult and expensive job of collecting the taxes owed. It is primarily this risk that motivates the government to sometimes require backup withholding taxes to be levied by financial institutions at the time investment income is earned.

RELATED TERMS
  1. Withholding Allowance

    An allowance an individual claims on a W-4 Form. A withholding ...
  2. W-9 Form

    An IRS form, also known as "Request for Taxpayer Identification ...
  3. W-4 Form

    A form completed by an employee to indicate his or her tax situation ...
  4. Withholding

    The portion of an employee's wages that is not included in his ...
  5. Canada Revenue Agency - CRA

    A federal agency that collects taxes and administers tax laws ...
  6. W-8 Form

    An IRS form that grants a foreigner an exemption from certain ...
Related Articles
  1. Taxes

    Tax-Saving Advice For IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  2. Retirement

    Avoiding Too Much Tax On Your Distributions

    IRA assets can't be taxed twice - find out how to avoid paying the second time around.
  3. Taxes

    Understanding The U.S. Tax Withholding System

    Understanding the origins of our tax withholding system is crucial to getting the most out of it.
  4. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
  5. Taxes

    What is the best method of calculating depreciation for tax reporting purposes?

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting principles, or GAAP.
  6. Retirement

    Are annuities for seniors only?

    Understand the benefits of investing in annuities at a younger age and how fixed or variable annuities might benefit the investor depending on risk tolerance.
  7. Taxes

    Can you write variable costs off your taxes?

    Learn if you can deduct variable or fixed costs from your business taxes and learn more about business deductions, cost of goods sold and gross profit.
  8. Taxes

    What are the best ways to lower my taxable income?

    Paying taxes is an unavoidable obligation each year, but individuals and business owners can take advantage of various strategies for tax savings.
  9. Investing

    What's a T Bond?

    Treasury bonds, or T-bonds, are marketable securities issued by the US government, and are available in increments of $100. Bonds have a maturity range of ten to 30 years, with 30 being the most ...
  10. Taxes

    How To Deduct All Of Your Charitable Donations?

    Donations made to charitable organizations can reduce your taxable income, thus your overall tax bill. But not all donations qualify to be deductable.

You May Also Like

Hot Definitions
  1. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  2. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  3. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  4. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  5. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  6. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
Trading Center