Backup Withholding: 24% Rate, B and C Notices, and Exemptions

Backup withholding is a flat 24% that a payer must take out of certain non-wage payments to you — freelance income, interest, dividends, royalties, rents, broker proceeds, and similar 1099-reported income — before the money reaches your account. It kicks in when you haven’t given the payer a correct taxpayer identification number (TIN), when the IRS tells the payer your TIN doesn’t match its records, or when the IRS has determined you underreported interest or dividend income on a past return. The withheld money isn’t a penalty and isn’t lost; it’s a prepayment of your federal income tax that you claim back when you file. The cash flow hit, though, is real until you do.

What Income the 24% Applies To

The rate is 24%, applied to the gross payment before any deductions or expenses, and it runs independently of your actual tax bracket. It reaches most income that shows up on 1099 forms and Form W-2G: interest, dividends, rents, royalties, independent contractor and freelance compensation, broker and barter exchange proceeds, patronage dividends paid in cash, certain government payments, gambling winnings, original issue discount paid in cash, and attorney fees or settlement payments.¹ Payment card and third-party network transactions reported on Form 1099-K are also covered, once transactions with a given payee exceed the calendar-year reporting threshold.²

Wages reported on a W-2 are not subject to backup withholding. Employer payroll withholding — driven by your W-4 and the graduated brackets — already covers that income.¹

The Four Triggers

A payer is required to start withholding 24% when any of these apply to you:³

You didn’t give the payer your Social Security number or EIN when it was required.
The IRS has notified the payer that the TIN you gave doesn’t match its records.
The IRS has determined you underreported interest or dividend income on a prior return and has told the payer to start withholding.
You failed to certify that you aren’t subject to backup withholding when you opened an account or first began receiving payments.

The first two are TIN problems. The third is an underreporting problem. The fourth is a paperwork problem. Each has its own path in and its own path out, and the IRS handles them through two separate notice programs.

B Notices: TIN Problems

When a payer files information returns with TINs that don’t match IRS records, the IRS sends the payer a CP2100 or CP2100A notice listing the mismatched accounts.⁴ The payer then sends you a “B notice.”

A first B notice comes with a blank Form W-9. Fill it out, return it, and the payer updates the file. If you don’t respond, the payer must begin withholding no later than 30 business days after receiving the CP2100.⁵

A second B notice — triggered when the same payee appears on another CP2100 within three years — works differently. A fresh W-9 will not fix it. Individuals need Social Security number verification from the Social Security Administration; businesses need IRS Letter 147C confirming the EIN. Sending back another W-9 is the most common mistake at this stage, and it won’t stop the withholding.

If you supply no TIN at all, or one that’s obviously wrong (too few digits, for example), the payer must start withholding immediately with no waiting period.⁴

C Notices: Underreported Interest and Dividends

The C notice path is slower. When the IRS finds that you underreported or failed to report interest or dividend income, it doesn’t immediately tell your bank to withhold. It sends you at least four notices over a minimum 120-day period, giving you time to file an amended return or pay the balance.⁶ Only after those notices go unanswered does the IRS instruct the payer to start deducting 24% from future interest and dividend payments.

The C program is narrower than the B program: it covers interest and dividends only, not freelance income, rents, or royalties. You can also land in it if you fail to certify, under penalty of perjury, that you aren’t subject to backup withholding when opening an interest- or dividend-bearing account.⁶

Who Is Exempt

Some payees are categorically exempt because they’re already subject to heavy reporting requirements or don’t owe income tax at all. The federal regulations and Form W-9 instructions list the following:⁷

C corporations and S corporations, generally.
Tax-exempt organizations under section 501(a), including charities and religious organizations.
The United States and its agencies, states, territories, and their political subdivisions.
Foreign governments and their agencies and political subdivisions.
Individual retirement accounts and custodial accounts under section 403(b)(7).
Banks and similar financial institutions defined under section 581.
Securities and commodities dealers required to register in the U.S.
Real estate investment trusts and entities registered under the Investment Company Act of 1940.
Charitable remainder trusts and other trusts described in section 4947.

For 2026, the W-9 instructions also add U.S. digital asset brokers to the exempt payee list.⁸ Exempt payees still complete a Form W-9; they just enter the appropriate exemption code on line 4 rather than certifying against backup withholding.

If You’re a Nonresident Alien

Backup withholding is a rule for U.S. persons. A nonresident alien generally avoids it by giving the payer a completed Form W-8BEN — not a W-9. A valid W-8BEN establishes foreign status and claims exception from both domestic information reporting and backup withholding for income types like broker proceeds, bank deposit interest, short-term original issue discount, and foreign-source investment income.⁹

Two cautions. Without a W-8BEN on file when requested, the withholding agent may apply either the 30% foreign-person rate or the 24% backup withholding rate, depending on the payment type. And if any joint account holder provides a W-9, the entire account is treated as a U.S. account, regardless of the other holder’s foreign status.

How to Stop Backup Withholding Once It’s Started

The fix depends on the trigger:¹

Missing or incorrect TIN: give the payer your correct TIN. Once they have it, the payer must stop withholding within 30 days.¹⁰
Underreported income: file any missing returns, report the correct amounts, and pay what you owe. The IRS then sends a stop notice to the payer.
Certification failure: sign the certification on Form W-9 and deliver it to the payer.

You submit the paperwork to the payer — your bank, brokerage, or client — not to the IRS. The payer handles the update. Every payment that goes out in the meantime loses 24%, so speed matters.

To prevent the problem in the first place, give a completed, accurate Form W-9 to every entity that pays you non-wage income. The form asks for your legal name, address, TIN, and a signed certification that the information is correct and that you’re not currently subject to backup withholding for underreported income.¹¹ Pull the current version directly from irs.gov rather than reusing an old file.

Getting the Withheld Money Back

Any amount withheld counts as federal income tax paid on your behalf, exactly like paycheck withholding. Report it as federal income tax withheld on your Form 1040 for the year you received the income.³ It comes back either as a smaller tax bill or a larger refund. The payer cannot refund money that has already been sent to the Treasury; the return is the only route.

The withheld amount shows up in Box 4 of your 1099. Check every 1099 you receive against your own records before filing. If a payer withheld but didn’t report it correctly on the 1099, ask for a corrected form; otherwise the IRS may not match the credit to your return, and any refund is delayed.

1
Internal Revenue Service. Backup Withholding
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Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding
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Internal Revenue Service. Topic No. 307, Backup Withholding
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Internal Revenue Service. Backup Withholding B Program
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Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
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Internal Revenue Service. Backup Withholding C Program
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eCFR. 26 CFR 31.3406(g)-1 – Exception for Payments to Certain Payees
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Internal Revenue Service. Instructions for the Requester of Form W-9 (Rev. January 2026)
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Internal Revenue Service. Instructions for Form W-8BEN
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Internal Revenue Service. Understanding Your CP542 Notice
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Internal Revenue Service. Instructions for the Requester of Form W-9