If you accept credit card payments from your clients, you are required to keep an accurate and current Taxpayer Identification Number and legal business name on file with your merchant account provider. It seems like a small thing, but inaccurate information (an old TIN, incorrect TIN, or errors in the legal business name) could result in a withholding of 28% of your credit card receipts.
As the American Express website explains, “Backup withholding at the current rate of 28% (subject to change) is required to be imposed on payment card transactions reported on Form 1099-K to US merchants that have not remitted their taxpayer identification numbers to the payor or in certain instances that have been notified to the payor by IRS of name/TIN mismatches.”
The IRS is supposed to notify taxpayers of mismatches before the withholding begins. However, an audit released in July 2011 by the Treasury Inspector General for Tax Administration found that the IRS had not adequately addressed the risk that funds might be withheld from merchants because the agency wasn’t able to resolve mismatches in a timely manner. Resolving such mismatches “may take significant resources for the IRS, payment-settlement entities, and taxpayers,” the audit says.
A year and a half later, although improvements have been made to the system, there is still a risk that IRS notification or the resolution process may be delayed, resulting in withholding being triggered.
Our advice to all our clients accepting credit card payments is to double-check with merchant account providers to verify accurate numbers and legal business names. There’s only a small chance that the 28% withholding would kick in for situations in which there are inaccuracies, but the resulting headaches wouldn’t be worth taking the risk.
