If a payment processor is holding back 24% of your credit card sales, the IRS has flagged a problem with the taxpayer identification number on your merchant account, and the withholding will continue until you send the processor a correctly completed Form W-9 that matches IRS records. This is backup withholding, sometimes called credit card withholding tax, and it applies to gross card revenue, not profit. The money isn’t lost — it counts as a prepayment of your federal income tax and comes back as a credit when you file — but recovering it can mean waiting until next April.
What the 24% Withholding Actually Is
Backup withholding is governed by 26 U.S.C. § 3406, which requires payment processors to divert a flat 24% of a merchant’s gross reportable payments to the IRS when certain conditions are met.1Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding2Internal Revenue Service. Backup Withholding The rate is fixed in the statute as the fourth-lowest individual income tax rate, which currently equals 24%.
Two features of this rate make it painful. It’s calculated on gross sales before the processor takes out its fees, interchange, chargebacks, or refunds. And it doesn’t care about your tax bracket or margins. Process $10,000 in card sales during a pay period and $2,400 goes to the IRS, whether your business runs a 5% margin or a 40% one. For a restaurant, retail shop, or service business running on cash flow, losing nearly a quarter of gross revenue can mean scrambling for rent, payroll, or inventory money.
Why It Started: The TIN Mismatch and the B-Notice
For credit card merchants, the withholding almost always traces to one of two problems: no taxpayer identification number was ever provided when the merchant account was set up, or the name and TIN on the processor’s filing don’t match what the IRS has on file.1Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding The mismatch is by far the more common. It shows up after a business changes its legal name, restructures, gets a new EIN, or made a typo on the original merchant application.
When the IRS spots a mismatch, it sends the processor a CP2100 or CP2100A notice listing every merchant whose information failed the check. The processor then sends you a “B-Notice.” What you need to do depends on whether this is the first or second time.3Internal Revenue Service. Backup Withholding B Program
First B-Notice
The processor sends a letter with a blank Form W-9. To stop withholding, fill out the W-9 with your correct legal name and TIN, sign it, and return it to the processor. Speed matters. The processor has to begin withholding no later than 30 business days after it received the CP2100 from the IRS, and that clock runs whether or not the letter has reached you yet.4Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
Second B-Notice
If the same TIN problem appears on a CP2100 notice within three years, you’ll get a second B-Notice. A W-9 by itself is no longer enough. You must provide independent proof that your name and TIN are correct: a copy of your Social Security card for an SSN, or IRS Letter 147C for an EIN.3Internal Revenue Service. Backup Withholding B Program Letter 147C is requested by calling the IRS business and specialty tax line, and it comes by mail, so build that delay into your response window.5Internal Revenue Service. Employer Identification Number
Once the processor has the correct documentation, it must stop withholding within 30 calendar days of receiving it.4Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
How to Stop the Withholding
The fix is a correctly completed Form W-9 sent to your payment processor, not to the IRS.6Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification Download the current version from irs.gov.
The form asks for your full legal name exactly as it appears in IRS records, your TIN, and your federal tax classification: sole proprietor, corporation, partnership, LLC, and so on. Sole proprietors and single-member LLCs usually use their Social Security number. Other entities use their EIN.7Internal Revenue Service. Form W-9 – Request for Taxpayer Identification Number and Certification A single wrong digit will keep the withholding running, so cross-check your number against your most recent tax return or the IRS letter you received when your EIN was assigned.
The signature at the bottom is under penalty of perjury and certifies that the information is correct and that you are not currently subject to backup withholding for another reason. If this is a second B-Notice, remember the W-9 alone won’t resolve it. You also need to send the Social Security card copy or Letter 147C.
After you submit, allow a few business days for the processor’s systems to update. Keep a copy of the W-9 and any confirmation you receive. If withholding hasn’t stopped within about 30 days, call the processor’s compliance department and verify that the name and TIN they now have exactly match what the IRS has on file.
Getting the Withheld Money Back
Backup withholding is treated as a prepayment of your federal income tax, the same way paycheck withholding is. You recover it on your annual return.
Your processor reports the total withheld for the year in Box 4 (“Federal income tax withheld”) of Form 1099-K.8Internal Revenue Service. Instructions for Form 1099-K (12/2026) Transfer that figure to the federal income tax withheld section of your return. Sole proprietors filing Form 1040 enter it on Line 25 alongside W-2 and other 1099 withholding. Corporations claim the credit on Form 1120.2Internal Revenue Service. Backup Withholding
If the total withheld exceeds what you actually owe for the year, the excess comes back as part of your refund. A business with $15,000 in actual tax liability that had $25,000 withheld would receive a $10,000 refund, absent other issues on the return.
The IRS will match what you claim against the amount your processor reported. If you used more than one processor during the year, collect a 1099-K from each and make sure the Box 4 totals add up to the number on your return. The processor cannot refund the money to you directly once it has been sent to the IRS. Filing is the only path back.
Mistakes That Keep the Withholding Running
The most common error is a W-9 that doesn’t exactly match IRS records. Businesses that changed their name, converted from an LLC to a corporation, or obtained a new EIN sometimes forget to update their information everywhere. The name on the W-9 must match the name associated with your TIN in the IRS database — not your current “doing business as” name if that differs.
The second common mistake is treating the first B-Notice like junk mail. The 30-business-day clock starts when the processor received the CP2100 from the IRS, not when you opened the envelope.4Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice By the time you notice, withholding may already be underway, and any recurrence of the same mismatch within three years pushes you into the more demanding second B-Notice.
The third is assuming your accountant handles this automatically. They don’t. The W-9 goes to the payment processor, and the processor’s compliance team is who decides when the withholding stops. Your accountant can help you get the details right, but responsibility for submitting the form and following through sits with the merchant.