Backup withholding

Backup withholding is a federal income tax that the IRS requires your company to withhold from payments made to you or your business. The government started backup withholding because it found that some people weren't reporting all of their income. This withholding is different from normal employee withholding. As an employer, you'll withhold backup tax at a flat rate of 24%.

According to the definition of backup withholding, this is important because it ensures that the right amount of tax gets withheld from each payment. If a bank makes a payment without withholding the correct amount of tax, then it could face penalties and interest charges for under-withholding taxes, as well as penalties for failing to file Form 945 for any applicable calendar year during which no taxes were withheld from cash payments made by banks.