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What is backup withholding? How do I prevent it or recover it?

Backup withholding is a form of tax withholding (currently at a rate of 28%) on income from stock sales, along with interest income, dividends, or other types of payments that are reported on Form 1099. Your brokerage firm is required to make backup withholding on any sales proceeds, such as those stemming from stock compensation, if you have not completed and filed IRS Form W-9 (for US tax residents) or IRS Form W-8BEN (for nonresident aliens).

Alert: Carefully complete Form W-9. The IRS will require backup withholding if the name and Social Security or tax identification number that you certify on the form do not match those in IRS records. Form W-8BEN expires at the end of the third calendar year after its completion, requiring you to file a new form to continue the exemption from backup withholding.

You can recover backup withholding with your regular annual tax return. If you are a nonresident alien in the US, you can still file a US tax return if you obtain a tax identification number by completing IRS Form W-7, which must be submitted along with your tax return. If backup withholding is the only reason for the filing, you complete and submit IRS Form 1040NR-EZ as your tax return.

For more details on backup withholding, see IRS Tax Topic 307 and IRS Publication 1281. For an example, including sample IRS forms, that shows how a non-US resident reclaims backup withholding, see a related FAQ elsewhere on this website.

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