Persons and Entities Exempt From Backup Withholding
As a result of the taxpayer’s income type or tax status, some taxpayers are not subjected to withholdings. Such we have:
- Corporations: The majority of corporations are exempt from backup withholding. They are however required to certify this status on Form W-9 by checking the appropriate box.
- Government Agencies and Organizations: These can be categorized as federal, state, and local government entities which are not backed by withholdings.
- Tax-Exempt Organizations: These are Nonprofits and other entities granted exemption under IRS rules, thus are usually exempt.
- Certain Financial Entities: These include banks, credit unions, and other regulated financial institutions which usually qualify for exemption.
Types of Income Exempt From Backup Withholding
The following payment types are not subject to backup withholding:
- Payment for real estate transactions.
- Payment to tax-exempt entities.
- Distributions from most retirement accounts (other tax rules apply).
How to Claim Exempt Status
If you are eligible for an exemption, you must certify it on Form W-9. This includes:
- Checking the box applicable to your entity type (e.g. corporation, exempt payee).
- Providing the correct Taxpayer Identification Number (TIN) for your entity.
- Submitting the form to your payer.
Completing this step incorrectly may lead to unnecessary withholding, even if you are eligible for exemption.
Bottom line
While a large number of individual and business payees are subject to backup withholding, there are certain entities and income types that are exempt. Ensure Form W-9 is completed with accurate information and applicable exempt status is indicated to avoid the mandatory 24% withholding on payments. Reach out to our dedicated team today. Dimov NYC CPA stands ready for professonal guidance on claiming exemptions as well as preventing unnecessary withholding.
