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#2256746 - 07/15/21 05:35 PM Backup Withholding and Interest Accruals
YHWB Offline
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Joined: Apr 2005
Posts: 634
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A certificate of deposit subject to Backup Withholding where accrued interest is paid/credited monthly.

For Backup Withholding, payments are considered made when a payment is credited (not accrued) to a payee’s account (whether or not withdrawn). So interest paid directly (like a paper check, or interest paid to a checking account) to the customer would be subject to the 24% held, or if the interest is credited to the customer’s same account, then 24% of the paid interest would be held.

The remaining 76% of interest would then be “compounded” and become the “new principal”.

For the 24% withheld, is interest paid on that amount, even though it has not been "released" to the customer? Is the 24% actually treated as paid interest for compounding?

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#2256757 - 07/15/21 06:39 PM Re: Backup Withholding and Interest Accruals YHWB
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
It is paid interest which will be included in the total interest paid on the 1099-INT or 1042S on which they have to pay taxes. It will not compound. Most banks just move these accounts at the next renewal to non-interest bearing rather than mess with it.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2256765 - 07/15/21 07:40 PM Re: Backup Withholding and Interest Accruals YHWB
YHWB Offline
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Posts: 634
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So the 24% in backup withholding, would not earn interest, even though it has been "paid". For example, you have a one year CD that pays interest monthly. Month 1 it becomes subject to withholding. For the next 11 months, the 24% held, earns no interest?

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#2256767 - 07/15/21 08:12 PM Re: Backup Withholding and Interest Accruals YHWB
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
Correct because you will be sending it to the IRS quarterly - it is no longer in the account.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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