Image: Flickr user Phillip Ingham
Continue Reading Below
When you receive compensation other than wages, the payer may ask you to fill out IRS Form W-9, which is a request for your taxpayer identification number, such as your Social Security Number or Employer Identification Number (EIN). This is necessary when an information return will be required, such as
- Form 1099-INT Used to report interest income
- Form 1099-DIV Used to report dividend income
- Form 1099-MISC Used for a variety of other income and payments
- Form 1099-B Used to report the sale of stock or mutual funds
Taxation on W-9 incomeIn general, income that results from a W-9 arrangement is not subject to IRS withholding. Rather, it is the payee's responsibility to claim the income on his or her tax return, and to pay any appropriate taxes. For example, income you receive from freelance work is generally taxed as self-employment income, which may require the payee to make estimated tax payments throughout the year. On the other hand, dividend income has its own set of tax rates, which are often lower than tax rates assessed on ordinary income.
The exception to the lack of taxes withheld is when the IRS has determined that you are subject to backup withholding. This can occur for a few reasons, such as if your W-9 contains an improper or incorrect taxpayer identification number. Or, the IRS may notify the payer to start backup withholding on interest or dividends because you have under-reported these items on your income tax return.
Calculating tax if your income is subject to backup withholdingIf your income from a W-9 arrangement is subject to backup withholding, the current flat rate set by the IRS is 28%. So, to calculate how much you can expect to be withheld, simply multiply your W-9 income by 0.28.
For example, if the IRS determines that your dividend income is subject to backup withholding and you earn $1,000 in dividend income for 2016, you can expect $280 to be withheld by the IRS.
Finally, it's important to note that if you do have money withheld from W-9 income as backup withholding, you should claim it as money withheld when you file your tax return. Even though the flat backup withholding rate is 28%, your actual tax liability may be more or less than this amount, and your tax return will determine if you are entitled to a refund, or if you need to pay more.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involvedin helping the world invest, better! If you see any issues with this page, please email us email@example.com. Thanks -- and Fool on!
The article How to Calculate Tax on W-9 Income originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.