What is backup withholding? is a good and common question for many. It is nothing but the tax deduction at source by the payer off certain kinds of payments. Under the Internal Revenue Code, persons making certain payments are required to pay only after withholding to 28% of such payments and depositing with IRS. This is the action of tax deduction at source by the payer is called “backup withholding.”
When you earn income by providing services inside the U.S., section 1441 of the Internal Revenue Code lays down that payer needs to withheld tax from payments made to foreign vendors unless the income is exempt under a tax treaty between the foreign vendor’s country and the U.S.A. That is the reason, a US establishment, be it Amazon or Smashwords or any other US entity, informs you about the need to update and fill your tax information form -8Ben-failing which they will deduct U.S. federal income tax at 30 percent from payments.