Backup Withholding

Some ignorant or deceived clients who owe a Citizen compensation for labor or services performed in any of the 50 States united will insist that the service provider fill out a W-9 form with the threat that they will "backup withhold" if the service provider doesn't fill out a W-9. By the time you finish reading this page you will know that such threats are without authority of law.

As stated on the bottom of the last page, backup withholding only applies to payments that are subject to information reporting.

This is the applicable section of law that deals with "backup withholding".

TITLE 26 - INTERNAL REVENUE CODE
Subtitle C - Employment Taxes
CHAPTER 24 - COLLECTION OF INCOME TAX AT SOURCE ON WAGES

-HEAD-
Sec. 3406. Backup withholding

-STATUTE-
(a) Requirement to deduct and withhold
(1) In general
In the case of any reportable payment, if -
(A) the payee fails to furnish his TIN to the payor in the manner required, [... then the payor shall deduct and withhold from such payment a tax...]
[Additional text omitted]

(b) Reportable payment, etc.
For purposes of this section—
(1) Reportable payment
The term “reportable payment” means—
(A) any reportable interest or dividend payment, and
(B) any other reportable payment.
[Additional text omitted]

(3) Other reportable payment
The term “other reportable payment” means any payment of a kind, and to a payee, required to be shown on a return required under—
(A) section 6041 (relating to certain information at source),
(B) section 6041A(a) (relating to payments of remuneration for services),
[Additional text omitted]

The W-9 instructions stated: "Payments that are not subject to information reporting also are not subject to backup withholding." This maze of law exists to tell you what payments and whose payments are subject to information reporting.

The implementing regulation for this statute says:

26 CFR § 31.3406(a)-1
Backup withholding requirement on reportable payments.
    (a) Overview. Under section 3406, a payor must deduct and withhold 31 percent of a reportable payment if a condition for withholding exists. [...]
    (b) Conditions that invoke the backup withholding requirement—(1) Conditions applicable to all reportable payments. A payor of a reportable payment must deduct and withhold under section 3406 if—
    (i) The payee of the reportable payment does not furnish the payee's taxpayer identification number to the payor, as required in section 3406(a)(1)(A) and § 31.3406(d)-1; or
[Remaining text omitted]

Section 3406(a)(1)(A) was examined above. It basically states: 'In the case of any reportable payment, if the payee fails to furnish his TIN to the payor in the manner required, then the payor shall deduct and withhold from such payment a tax...'

§ 31.3406(d)-1
Manner required for furnishing a taxpayer identification number.
(a) Requirement to backup withhold. Withholding under section 3406(a)(1)(A) applies to a reportable payment (as defined in section 3406(b)) if the payee does not furnish the payee's taxpayer identification number to the payor in the manner required by this section. [...] See the applicable information reporting sections and section 6109 and the regulations thereunder to determine whose taxpayer identification number should be provided.

The "applicable information reporting sections" state WHAT must be reported.
"Section 6109 and the regulations thereunder" state WHOSE information must be reported.

Point of logic:

If you are not a person whose payment information must be reported, then what you are paid is not a "reportable payment."

Bottom line:

Unless you are a nonresident alien or foreign person as described in paragraph (b)(2)(i), (ii), (iii), (vi), (vii), or (viii) of the implementing regulation of Section 6109, you are NOT required to furnish an identifying number "under authority of law" and thus backup withholding laws do not apply.

The IRS can only collect tax on income it knows about. If the law does not require information about certain compensation to be reported to the IRS, then it must follow that the IRS is not required to collect tax on that compensation.

The truth IS as simple as shown on this page.

The truth is only found by reading the law, therefore the W-9 instructions are deceptive by omission.

Now that you have examined the applicable law, you know that a client has no authority to backup withhold if you refuse to provide a taxpayer identifying number on a form W-9.

If such a client does withhold from your payment and sends it to the IRS, the client has just committed a crime. The client has executed the tort of conversion.

My dictionary says:

tort n. Law. Damage, injury, or a wrongful act done willfully, negligently, or in circumstances involving strict liability, but not involving breach of contract, for which a civil suit can be brought.

conversion n. 4. Law. a. The unlawful appropriation of another's property.
Source: American Heritage Electronic Dictionary