What is backup withholding?

There are certain times when the IRS requires an entity making payments to a taxpayer to keep a portion of those payments and send that portion to the IRS. This money kept by the payer and sent to the IRS is known as backup withholding. If the IRS requires a payer to take a backup withholding, the current rate is 28% (and this rate is set to remain in effect for all payments made through December 31, 2010). For example, if you are subject to a backup withholding, when your bank makes interest payments to you for your savings account, 28% of your earned interest will be held back by the bank and sent to the IRS.