Backup withholding is a procedure used to ensure that federal income tax is paid on earnings even though the recipient cannot be identified by a Social Security number. Banks, brokers, and other entities report nonwage earnings paid out on IRS Form 1099. When the form cannot be filed because it lacks the taxpayer's Social Security number, 28% (through December 31, 2012) of the interest, dividends, or fees is withheld by the payer and remitted to the federal government.
