Overview

Backup withholding is a secondary withholding tool the IRS uses to collect tax when payees don’t provide correct taxpayer information or when reporting problems exist. The current backup withholding rate is 24% (effective for recent years and in effect through 2025). It most commonly applies to interest, dividends, certain payments reported on Forms 1099, and broker proceeds. See the IRS guidance for details: https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding.

Why it matters

  • Cash flow: 24% withheld reduces the immediate amount you receive. If you’re a small business or contractor, that can create short-term liquidity pressure.
  • Tax accounting: Withheld amounts are treated as federal tax payments and are creditable on your return; you must file to reclaim any over-withheld amount.

Common triggers (concise)

  • Missing or incorrect TIN on a W-9 (name/TIN mismatch). For nonresident aliens, failure to supply a proper W-8 form may trigger other withholding rules.
  • IRS notification to payers (name/TIN mismatch notices such as the CP2100/CP2100A series) telling payers to begin backup withholding.
  • Failure to certify exemption from backup withholding when required (wrongly signing an exempt box on Form W-9).

Who’s affected

  • Individuals receiving interest or dividends, independent contractors, and vendors reported on 1099s.
  • Payees that don’t provide a correct TIN or that have reporting discrepancies.

What recipients should do (step‑by‑step)

  1. Confirm the reason. Ask the payer for the written notice or explanation for withholding and check your account statements for withheld amounts.
  2. Provide a corrected Form W-9 promptly if the problem is an incorrect or missing TIN. (See our guide to Form W-9 for help: https://finhelp.io/glossary/form-w-9/.)
  3. If you believe the IRS made an error, keep records and contest the issue only after confirming your TIN and name exactly match Social Security Administration/IRS records.
  4. File your federal income tax return. Any backup withholding is credited against your tax liability; file to claim a refund if too much was withheld.

What payers should do (practical steps)

  • Follow IRS notices: If you receive CP2100/CP2100A (name/TIN mismatch) guidance, act according to the IRS instructions and document your attempts to get a correct TIN.
  • Use TIN Matching where available to reduce mismatches before filing 1099s.
  • If backup withholding applies, withhold 24% and deposit/report the amounts using Form 945 (Annual Return of Withheld Federal Income Tax) and report to payees on Form 1099. Our article on handling backup withholding and Form 945 explains the payer steps in detail: https://finhelp.io/glossary/how-to-handle-backup-withholding-and-filing-form-945/.

How to stop backup withholding

  • Provide the correct TIN and a properly completed Form W-9 to the payer. Once the payer has a valid W-9 and no IRS notice requires withholding, the payer should stop withholding.
  • If withholding continues after you corrected your information, request written confirmation from the payer and contact the IRS for guidance.

How to reclaim withheld amounts

  • The withheld tax is reported to you on a Form 1099 (or shown on account statements). Claim the amount on your federal tax return as a payment. If withholding exceeds your tax due, you’ll receive a refund when you file.

Common misconceptions

  • Backup withholding is not the same as backup withholding on payments to foreign persons. Nonresident aliens generally use Form W-8 series and are subject to different withholding rules (often statutory rates up to 30%)—not the 24% backup withholding that applies to U.S. persons.
  • It’s not only for 1099‑MISC payees—interest and dividends are frequent subjects of backup withholding.

Quick professional tips

  • Keep a clean W-9 on file for every vendor and update it after ownership or legal-name changes.
  • For businesses: enroll in IRS e-services to use TIN Matching and reduce the chance of receiving CP2100 notices.
  • For recipients: keep copies of W-9s you submit and confirm the payer received and processed them.

Authoritative sources and forms

Disclaimer

This article is educational and not a substitute for personalized tax advice. For specific situations—complex reporting, multiple payers, or large withheld amounts—consult a CPA or tax attorney.

Internal resources