When opening a checking or personal account, you often see either a checkbox or some selection within the application that asks if you are or aren’t exempt from backup withholding. Many people, especially individuals, are unaware if that question applies to them or not. Are you exempt? Generally, this section applies mainly to business owners or investors that have a TIN, tax identification number and failed to report the proper interest or dividends. The backup withholding doesn’t typically pertain to most individuals applying for an account. However, there are several business and organization owners that are applying for an account through their business and most times they are subject to withholding.
Can backup withholding apply to me?
Typically, unless you are a business or a self employed worker with a TIN and you file a 1099 at the end of the fiscal year, you shouldn’t have to worry about any backup withholding. This doesn’t really apply to you unless you haven’t reported certain interest or dividends made from an investment. If you don’t even know what that means, then you surely shouldn’t have to worry about this selection at all.
Why Does the Application ask me?
This is generally a practice all financial institutions are required to do in order to ensure the IRS is getting their money. Since there are many situations where monies are not reported to the Internal Revenue Service and most of that money is circulated throughout financial institutions through credit cards and personal checking accounts, financial institutions serve the middle marker by ensuring that the IRS is aware of all accounts and any interest and dividends from any investments made by the owner of the account. That is the main reason why the account will ask if you have put the right TIN.
What if it does apply to me?
If that question does apply to you, you simply have to answer it correctly and honestly. If you haven’t failed to report any income on investments, you are not subject to withholding, however if you have failed to report the required information, you will have to inform that bank so they may impose the proper tax withholding to that account. This will involve a certain percentage being withheld in order to ensure that the taxes are paid by that tax payer.
Many people ignore this question on a checking account application because if you don’t know, it typically doesn’t apply to you. However, there are times when we are unaware of certain limitations and situations that apply to us, so it never hurts to wonder and find out. If in the event you lie, you are subject to penalties and various consequences, so it is better to make sure.