Article Summary
This article explains backup withholding, whether it applies to you, how it affects River, and the U.S. citizen vs. U.S. person distinction.
Backup withholding is a special IRS rule that applies only in certain cases. It requires financial institutions to withhold 24% of certain payments and send it directly to the IRS if a taxpayer has not met specific reporting requirements, such as not providing a correct Taxpayer Identification Number (TIN) or being notified by the IRS of underreported interest or dividend income.
This is different from paying taxes normally, and only a small number of people are ever subject to backup withholding.
How do I know if I am subject to backup withholding?
You are only subject to backup withholding if one of the following applies:
- You haven't provided your correct taxpayer identification number (such as your Social Security Number)
- The IRS has formally notified you that you underreported certain types of income in the past
- You didn't certify, when asked (usually on a Form W-9), that you are not subject to backup withholding
If backup withholding applies to you, you would be notified by the IRS.
Can I use River if I am subject to backup withholding?
No. Unfortunately, if you are subject to backup withholding, you cannot use River at this time. The good news is that this situation is uncommon, and most clients are not affected. If you've never been notified by the IRS or asked to certify your status, it's very likely that backup withholding does not apply to you.
What is the difference between a U.S. citizen and a U.S. person?
A U.S. citizen is an individual who was born in the United States, became a U.S. citizen through naturalization, or acquired citizenship through U.S. citizen parents. U.S. citizens are always considered U.S. persons for tax purposes and are generally not subject to backup withholding if they provide a valid taxpayer identification number, such as a Social Security number.
A U.S. person includes any of the following:
- U.S. citizens
- U.S. resident aliens, defined as either lawful permanent residents or those meeting the substantial presence test
- Certain U.S. domestic entities like corporations, partnerships, and trusts
U.S. persons must also certify their status, usually on Form W-9, to avoid backup withholding. If they fail to provide a valid tax identification number or certification, the payer must withhold a percentage of payments for federal tax purposes.
What is a payer? Is River defined as a payer?
In tax terms, a payer is any individual or entity that ensures the IRS receives the correct tax documentation and, if necessary, withholds tax amounts.
A payer can include any of the following:
- A bank paying you interest on a savings account
- A cryptocurrency exchange paying you proceeds from selling assets
- A brokerage firm paying you dividends or stock sale proceeds
By this definition, River is a payer.