1099 backup withholding is a flat 24% that a payer must subtract from certain payments reported on a Form 1099 and send straight to the IRS, and it only starts when something is wrong with the payee’s tax identification or certification. It ends once the underlying problem is fixed. If you’re a contractor who just saw 24% missing from a check, that money isn’t lost: it becomes a credit on your next tax return. If you’re the business making the payment, the rules tell you exactly when to start, how much to hold, where to deposit it, and how to report it.
What Triggers the 24% Withholding
Federal law identifies four situations that require a payer to begin backup withholding. Two apply to any reportable 1099 payment. The other two apply only to interest and dividend income.
- The payee never provides a Taxpayer Identification Number, usually by not returning a completed Form W-9, or gives a number that is obviously wrong (fewer than nine digits, too many digits, or containing letters). Withholding begins immediately on the first payment.
- The IRS notifies the payer that a TIN on file doesn’t match its records. The payer sends the payee a “B-Notice,” and withholding must begin no later than 30 days after the IRS notice if the payee hasn’t corrected the TIN.
- The IRS directs the payer to withhold because the payee has underreported interest or dividends. Withholding starts 30 days after the payer receives the directive. This trigger does not touch contractor pay.
- The payee fails to certify on Form W-9 (Part II) that they are not currently subject to withholding for underreporting. Again, interest and dividends only.
For most small businesses that hire contractors, the first two triggers are the ones that come up. The underreporting triggers cover investment income and rarely reach a company issuing 1099-NEC forms.
Which 1099 Payments Are Covered
Backup withholding can apply to almost any payment reported on a 1099-series form. The categories the IRS lists include nonemployee compensation (1099-NEC), interest (1099-INT), dividends (1099-DIV), rents, royalties and attorney gross proceeds (1099-MISC), broker and barter proceeds (1099-B), payment card and third-party network settlements (1099-K), certain government payments (1099-G), and gambling winnings not already subject to regular gambling withholding (W-2G). If the payment is reportable on a 1099, assume backup withholding can apply once a trigger condition exists.
If You’re the Payee: Preventing It and Getting the Money Back
Prevention is a single step. Return a properly completed Form W-9 to the payer before your first payment. Enter your correct TIN, sign the certification in Part II, and leave the backup withholding certification line intact unless the IRS has actually notified you about underreporting. That one form handles two of the four triggers.
If a payer sends you a B-Notice saying your TIN doesn’t match IRS records, respond right away with a corrected W-9. If it’s a Second B-Notice (a second mismatch within three years for the same payee), a W-9 alone is not enough. You’ll need to send a copy of your Social Security card or an IRS Letter 147C confirming your name and Employer Identification Number match IRS records. Once the payer has your corrected information, withholding should stop within 30 days.
Getting the withheld money back is straightforward. Backup withholding is not a penalty and not additional tax. It’s a prepayment of your regular income tax, exactly like the federal withholding taken from a W-2 paycheck. Your Form 1099 will show the total withheld in Box 4 (“Federal Income Tax Withheld”). Put that amount on the federal income tax withheld line of your Form 1040. It reduces what you owe dollar for dollar, and any excess comes back as a refund. Keep the 1099 with your tax records as proof.
Stopping withholding that was triggered by an underreporting notice is a longer road. The IRS has to make a formal determination — for example, that there was no actual underreporting, that you’ve paid all tax, penalties, and interest owed, or that continued withholding would cause undue hardship. The IRS then issues a written certification for you to give your payers and separately notifies them to stop. The timing depends on when the IRS acts, and in some cases the determination isn’t effective until December 1 of the year it’s made.
If You’re the Payer: The B-Notice Process
Most payers first meet backup withholding through a CP2100 or CP2100A notice from the IRS. Both list payees whose TINs don’t match IRS records. CP2100 goes to payers who filed 50 or more information returns with errors; CP2100A goes to those with fewer than 50. The instructions are the same.
First B-Notice
When a payee appears on one of these notices for the first time, compare the IRS listing against your own records. If the mismatch is a data entry error on your side, fix it internally. If your records match what the payee gave you, send a First B-Notice and a blank Form W-9 to the payee promptly. If you don’t receive a corrected W-9, you must begin backup withholding no later than 30 business days after the date of the CP2100 or CP2100A (or the date you received it, whichever is later).
Second B-Notice
If the same payee shows up on another CP2100 or CP2100A within three years, send a Second B-Notice. A W-9 alone won’t clear it this time. The payee must supply a copy of a Social Security card or IRS Letter 147C confirming the name and EIN on file.
Missing or Obviously Invalid TINs
The 30-day timeline is for TINs that look valid but don’t match IRS records. If a payee never provided a TIN, or gave a number that is obviously wrong, there is no notice period. Withholding starts on the first reportable payment.
Depositing and Reporting What You Withheld
The calculation is a flat 24% of the gross reportable payment. On a $5,000 contractor invoice, you withhold $1,200 and pay the contractor $3,800. The $1,200 belongs to the IRS and is deposited through the Electronic Federal Tax Payment System (EFTPS), the same system used for payroll tax deposits.
Deposit Schedule
Deposit frequency depends on your total Form 945 liability from two years earlier. For 2026 deposits, the IRS looks at your 2024 Form 945. A liability of $50,000 or less makes you a monthly depositor, with deposits due by the 15th of the following month. A liability above $50,000 puts you on a semi-weekly schedule. One override applies to both: if your accumulated liability reaches $100,000 or more at any point in a deposit period, the deposit is due the next business day.
Late Deposits
Late deposits carry escalating penalties. You pay 2% of the unpaid deposit if it’s 1–5 calendar days late, 5% at 6–15 days, 10% beyond 15 days, and 15% if the deposit is more than 10 days late after the IRS demands payment. Only the highest applicable rate applies; the tiers don’t stack. Interest runs on unpaid penalties until they’re paid.
Form 1099 and Form 945
Report the total withheld from each payee in Box 4 of the appropriate 1099. For a contractor, that’s Box 4 of Form 1099-NEC; for rent, royalties, or attorney gross proceeds, Box 4 of Form 1099-MISC. Furnish the 1099 to each payee by January 31. Form 1099-NEC is also due to the IRS by January 31. Form 1099-MISC is due February 28 on paper or March 31 electronically.
Form 945 is the annual reconciliation of all non-payroll federal income tax withholding, backup withholding included. The total on Form 945 must match the combined Box 4 amounts across every 1099 and other information return you issued. File it by January 31, with an automatic extension to February 10 if every deposit for the year was on time.
What Happens If a Payer Ignores the Rule
A payer who was required to backup withhold and didn’t can become personally liable for the tax that should have been collected. The IRS treats withheld taxes as trust fund money that belongs to the government from the moment it should have been deducted, whether the payer actually deducted it or not.
Any person responsible for collecting and paying over withheld taxes who willfully fails to do so faces a penalty equal to the full amount of the uncollected tax. “Responsible person” typically means owners, officers, or anyone with authority over financial decisions, and the liability follows the individual through a corporation or LLC. Combined with late-deposit penalties on any withholding actually collected but not remitted, plus interest, ignoring backup withholding is one of the more expensive compliance mistakes a small business can make.
Foreign Payees
Backup withholding does not apply to foreign payees. They fall under a separate withholding regime and establish their status with Form W-8BEN (for individuals) instead of Form W-9. A valid W-8BEN takes a payee out of backup withholding, though other withholding rules may still apply. If someone claims foreign status but doesn’t provide a W-8BEN when asked, treat them like any other payee without a valid TIN and withhold at 24%.