Simple tax question (?) on backup withholding

September 3, 2006 4:55 PM

I'm new at this whole taxes thing and have a question about backup withholding and w9 forms.

I make some extra money through google's adsense program. Currently I have no taxes taken out of my pay which means during the year I have to set aside enough money to pay my taxes at the end of the year. I'd prefer to have the money taken out to make the checks I receive equal to the actual amount of spendable money I have.

The W9 form has a section which says "Check here if you have been notified by the IRS that you are currently subject to backup withholding because you have failed to report all interest and dividends on your tax return." which will cause 28% to be taken out of my check and sent to the IRS. This looks like what I want to do, but....

1) Should this not be done mid-year? (I'm already paying projected quarterly taxes)

2) If I end up overpaying, will I get a refund?

3) Am I admitting to any wrongdoing? (I haven't been "notified by the IRS")

Is there a reason I wouldn't want to do this?

Thanks!

posted by null terminated to work & money (8 comments total)

No, you don't want to do that -- backup withholding is meant for deadbeats who don't pay their taxes, and you don't want to go there.

Why don't you just have money withheld from your pay like most people do? It would be a lot more straightforward!
posted by xil at 4:59 PM on September 3, 2006

xil: I'm trying to figure out the best way to have money withheld from my pay. With other jobs I have this happened normally but it doesn't seem to happen with Google's Adsense program. They have an online W9 form which is all I have to work with.
posted by null terminated at 5:02 PM on September 3, 2006

W-9's are typically for the use of short-term or contracting employees. They basically provide a streamlined way for the employer to pay you in an irregular or short-term way, without having to do the fairly complex paperwork required to deal with the tax withholding. When you get a W-9, you're right that you have the obligation to pay your estimated quarterly tax on time.

Backup withholding is a penalty imposed on you by the IRS once they've audited you. It's designed to stop you from tax fraud.

So you wouldn't want to check that box. First of all, you're *not* subject to backup withholding. Second, your employer might think you'd been convicted of tax fraud. Third, especially if your employer's small and doesn't use an expensive payroll software package, it might make a huge hassle for them.

To answer question number two: if you end up overpaying your own tax or having it withheld, yes, you always get the excess refunded to you. This is determined by the (presumably correct) calculations you submit on your end-of-year 1040.

If you really wanted to do this, the right way would be to ask your employer to do withholding (i.e., you would fill out a W-4, and receive a W-2 at the end of the year.)

Here's a tip - you are always going to be much better than your employer's costly tax software at knowing your own tax situation. If the employer overwithholds, you have no recourse; if the employer underwithholds, you are still liable for quarterly tax payments.

Here's another tip: if your employer promises to send you a W-2 and then doesn't do so, you can be in for years of headaches, and possibly an audit. I speak from unfortunate experience.

So if I were you I'd just keep on with what you're doing.

Disclaimer: I am not a tax professional. This is amateur advice.
posted by ikkyu2 at 5:09 PM on September 3, 2006

I did some googling and it appears they added an "I am exempt from backup withholding" checkbox to their online w9 form after I signed up (they added it last Feb). I resubmitted the w9 form leaving this box unchecked, which may do what I want. Any other comments are welcome.
posted by null terminated at 5:09 PM on September 3, 2006

ikkyu2: thanks for the advice.
posted by null terminated at 5:13 PM on September 3, 2006

My understanding of this is that you get money withheld from your pay, i.e. income you make from your job. For other, more ocassional sorts of income, like AdSense earnings, you only have money withheld if you have done a truly spectacularly poor job of paying your taxes in the past, so the IRS insists that you get 28% taken out of everything to make darn sure that you pay your fair share. As xil said, this is meant only for deadbeats.

If you're self-employed/a freelancer, you should talk to a tax adviser about the best way to handle your situation and get money withheld when possible, or at least seek some MiFi advice on that from others in your situation. You might also find it useful to set up an additional bank account (presumably one that's free to you) and transfer an appropriate percentage to that account out of the money you earn every month, so that you're not tempted to spend the money you owe to the IRS.
posted by zachlipton at 5:17 PM on September 3, 2006

Ah, I see this is Google Adsense we're talking about here.

Google Adsense doesn't pay 'wages,' so they're not required to withhold. You are an independent contractor, not an employee. You won't be able to get them to withhold tax on your behalf, because the IRS says they aren't supposed to.
posted by ikkyu2 at 5:19 PM on September 3, 2006

But, if you have a regular job as well (do you?), one where you filled out a W-4 form, you can have whatever money you like withheld from that paycheck. It's very common to tweak your withholding, either by messing with your number of exemptions or by withholding an extra amount per paycheck.

IRS Publication 919 has many more details. Also the IRS provides a calculator which is a lot more comprehensible than the worksheet that comes with the W-4.
posted by xil at 5:56 PM on September 3, 2006