Back-up withholding

Back-up withholding is triggered when a bank, brokerage firm, or other institution pays interest, dividends, or other income that must be reported on IRS Form 1099 to a payee who does not provide a tax identification number (TIN), typically a Social Security number, or provides an incorrect number.

While income that's reported on Form 1099 is not normally subject to withholding, in this instance, the payer must withhold 28% of the gross amount as income tax.

You can avoid back-up withholding in most cases by providing a correct TIN using IRS form W-9. But if the IRS determines you have underreported your investment income, it may require back-up withholding even if the payer has your TIN.