How to Calculate Tax on W-9 Income

By Motley Fool Staff – Updated Apr 29, 2025 at 11:38PM

Key Points

Form W-9 collects taxpayer ID for reporting income such as dividends and interest.
W-9 income isn't initially withheld; payees must report and pay taxes themselves.
Backup withholding at 28% applies if issues like under-reporting trigger IRS action.
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When you receive compensation other than wages, the payer may ask you to fill out IRS Form W-9 (link opens PDF), which is a request for your taxpayer identification number; for instance, your Social Security Number or Employer Identification Number (EIN).

A hand using a calculator on a desk filled with paperwork.

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This information is necessary when an information return will be required:

Form 1099-INT: Used to report interest income
Form 1099-DIV: Used to report dividend income
Form 1099-MISC: Used for a variety of other income and payments
Form 1099-B: Used to report the sale of stock or mutual funds

Taxation on W-9 income

In general, income that results from a W-9 arrangement is not subject to IRS withholding. Rather, it is the payee's responsibility to claim the income on his or her tax return and to pay any appropriate taxes.

For example, the income you receive from freelance work is generally taxed as self-employment income, which may require the payee to make estimated tax payments throughout the year. On the other hand, dividend income has its own set of tax rates, which are often lower than tax rates assessed on ordinary income.

The exception to the lack of taxes withheld is when the IRS has determined you are subject to backup withholding. This can occur for a few reasons, such as your W-9 containing an improper or incorrect taxpayer identification number. Alternatively, the IRS may notify the payer to start backup withholding on interest or dividends because you have under-reported these items on your income tax return.

CalculatingCalculating tax if your income is subject to backup withholding

If your income from a W-9 arrangement is subject to backup withholding, the current flat rate set by the IRS is 28%. So, to calculate how much you can expect to have withheld, simply multiply your W-9 income by 0.28. For example, if the IRS determines that your dividend income is subject to backup withholding and you earn $1,000 in dividend income for 2016, you can expect $280 to be withheld by the IRS.