Use of trade name triggers 24% backup withholding

A nonprofit company received notice from the IRS that it is to withhold 24% of the total on future payments to one of its major vendors as “backup withholding. Neither the vendor nor the nonprofit was happy with this burden!

It turns out that even though the Taxpayer Identification Number was correct on the Form 1099, the vendor’s business name that the nonprofit entered into the accounting system and put on the 1099 was a trade name different from the actual legal name of the vendor.

Fortunately, we can fix it just by correcting the vendor’s business name on future invoices.

Lesson learned: double-check vendor accounting records for accuracy before sending out the Form 1099.

The three options we wound up with that address both tax and branding concerns are:

1. Give the client a corrected W9 with the legal business name and continue to do business under the DBA.
2. Use both the business name and the DBA trade name on all communications.
3. Get a separate Taxpayer Identification Number for the DBA.

(None of our discussion addressed the registration and use of the DBA which is a separate topic altogether).