Overview

Backup withholding is a federal mechanism that forces payers (businesses, organizations, or clients) to withhold tax from certain reportable payments when the payee’s identity or reporting history is uncertain. The current backup withholding rate is 24% (IRS) and applies when a payee fails to give a correct TIN on Form W-9 or the IRS issues a notice directing withholding. For a full IRS description, see the IRS backup withholding page (https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding).

Key triggers (when payers must withhold)

  • Payee fails to provide a correct TIN on Form W-9. See our guide to Form W-9 for details: “Form W-9” (https://finhelp.io/glossary/form-w-9/).
  • The payer receives an IRS mismatch notice (often called a B-Notice or CP2100/CP2100A) telling them the payee’s name/TIN combination didn’t match IRS records.
  • The IRS notifies the payer directly to begin backup withholding because of underreporting or other issues.

Which payments are affected

Backup withholding can apply to many reportable payments, including interest, dividends, rents, royalties, and payments reported on information returns (for example, payments that would be reported on 1099 series forms). Confirm specifics on the IRS page linked above.

Practical examples

  • Contractor example: A freelance web developer is paid $5,000 but didn’t return a completed W-9. The payer withholds 24% ($1,200) and remits $3,800 to the contractor — and $1,200 to the IRS as backup withholding.
  • Payer example: A small business issues a B-Notice after a TIN mismatch and must start withholding until the contractor provides a corrected W-9 and the payer follows the IRS B‑Notice procedures.

Actions for independent contractors (what to do immediately)

  1. Give a completed Form W-9 with your correct TIN before making payments. See our Form W-9 explainer: “Form W-9” (https://finhelp.io/glossary/form-w-9/).
  2. If you get a B-Notice or discover withholding was applied, send the correct W-9 and follow up with the payer in writing.
  3. If backup withholding still occurred in error, claim the withheld amount as a credit on your federal tax return — it’s treated like federal income tax withheld. If you need help, consult a tax professional.

Actions for payers (how to avoid mistakes and comply)

  1. Collect a completed Form W-9 before issuing reportable payments and store it with your vendor records.
  2. Use the IRS TIN Matching program (for authorized payers) or carefully follow B-Notice instructions if you receive mismatch notices.
  3. If required to withhold, deposit and report backup withholding amounts properly — payers report annual backup withholding on IRS Form 945. See FinHelp’s guide: “How to Handle Backup Withholding and Filing Form 945” (https://finhelp.io/glossary/how-to-handle-backup-withholding-and-filing-form-945/).
  4. Issue correct information returns (1099s) and, if needed, corrected forms. For guidance on correcting 1099s, see: “Correcting 1099-NEC Mistakes: When to Issue a Corrected Form and How” (https://finhelp.io/glossary/correcting-1099-nec-mistakes-when-to-issue-a-corrected-form-and-how/).

Stopping or reversing backup withholding

  • To stop future withholding: supply the payer a valid Form W-9 with the correct TIN and name and, if you received a B-Notice, follow its instructions. Once the payer has a correct W-9, they may stop withholding (subject to any IRS instructions).
  • To get withheld amounts back: report the withheld amount as tax payments on your federal income tax return to reclaim the credit. If the payer withheld in error and refuses to refund, you can still claim the credit on your return; consider speaking with a tax advisor.

Common pitfalls and best practices

  • Don’t delay returning a W-9. Missing or incorrect TINs are the most common trigger.
  • Payers should not ignore CP2100/CP2100A notices; failing to act can lead to liability and penalties (IRS guidance).
  • Keep good documentation: W-9 forms, copies of B-Notice correspondence, and records of deposits and reporting.

My experience and practical note

In my practice working with small businesses and contractors, the simplest preventive step that avoids nearly all backup withholding headaches is to collect and verify a W-9 before the first payable invoice. When disputes arise, prompt documentation and communication between payer and payee usually resolve withholding errors without formal IRS disputes.

How withheld funds are reported

Payers remit withheld amounts to the IRS and report them on Form 945 (Annual Return of Withheld Federal Income Tax). Payees receive the usual information return (for example, a 1099) showing amounts paid and any backup withholding applied.

Where to get official help

Disclaimer

This article is educational and not a substitute for personalized tax advice. For specific situations, consult a qualified tax advisor or CPA.

Related FinHelp.io resources