Backup Withholding

03|2022

We hope our merchants never encounter backup withholding, but it can be an unfortunate reality for any business owner. The good news is that if you find yourself in this situation, we can help! We’ll cover some frequently asked questions regarding backup withholding, and encourage you to reach out to our team right away for assistance!

What is backup withholding?

Most business owners are familiar with the IRS’s 1099 form – this is the tax form that reports certain types of income payments, such as credit card transactions, to the IRS. When a business accepts card payments from their customers, the processor will provide the business with a 1099 each January for tax purposes which lists a total gross amount of payment card transactions, a breakdown by month, and some basic information for both the processor and the merchant.

There are some cases where a merchant may be subject to backup withholding. Backup withholding requires the processor to withhold tax from payments not otherwise subject to withholding and usually occurs when the processor has incorrect taxpayer information from the merchant. The amount withheld will be applied to federal income tax for that year much like it is withheld on a paycheck.

How do I get the held funds?

If you’re subject to backup withholding, the processor must withhold a specified flat rate from all deposits. The tricky part is that the funds are not kept by your processor, but sent to the IRS as tax. This is also reflected on your processing statement, which will show the dates and amounts as well as where they were sent. Because of this, it is not up to the processor to simply release the funds.

Any funds held due to backup withholding will be recorded on your 1099 for the applicable year, and will be returned or applied toward your taxes due when filing taxes for the full year.

How is backup withholding resolved?

Handling an issue like this can be incredibly confusing and time consuming. It can take weeks, or even months, to get things fully resolved. Luckily, we can help! To avoid more funds being held from your deposits, you’ll need to stop using the existing account. We can get you set up with a new corrected account right away to avoid any interruptions to your business, and then work with you personally on the next steps.

If your business is in backup withholding, contact us right away for help!