Backup withholding is a tax levied against investment income, such as interest and dividends, at a specific tax rate. This withholding ensures that the government will receive tax revenues from certain types of investments, while also accelerating the receipt of those revenues. This tax is applied when an investor has not supplied a valid taxpayer identification number, which increases the probability that the individual will not voluntarily remit a tax payment to the government. The withholding is made by the payer, who remits it to the government. If the payer does not withhold the required tax, the payer may become responsible for the amount of the payment that was not made to the government.
Backup withholding is not an additional tax. The taxpayer can deduct this amount from his or her year-end tax filing, as a reduction of the amount of tax due.