If a bank, brokerage, or client told you that you’re subject to backup withholding, it means they’re now required to pull 24% out of certain payments to you and send that money to the IRS. It happens when something is wrong with the taxpayer identification number on file or when the IRS has flagged you for unreported interest or dividend income. The withheld money isn’t a penalty and isn’t lost; you claim it back as a credit when you file your return. But it stays with the IRS until then, so the sooner you fix the underlying problem, the sooner the deductions stop.
What Backup Withholding Actually Is
Backup withholding is a flat 24% federal tax that payers deduct from certain income before paying you the rest. The rate is set by statute and tied to the fourth-lowest individual income tax bracket.1Office of the Law Revision Counsel. 26 U.S. Code 3406 – Backup Withholding Unlike paycheck withholding, it doesn’t adjust for your bracket, filing status, or W-4 elections. Every affected dollar is cut by the same 24%.
The name describes the function. The IRS normally tracks non-wage income through information returns like the various 1099s. When the reporting chain breaks — a missing or mismatched identification number, or a history of leaving interest and dividends off a return — the law falls back on withholding to make sure the tax gets collected.
Why You’ve Been Flagged
Federal law lists four specific triggers. Two can hit any reportable payment; the other two apply only to interest and dividends.1Office of the Law Revision Counsel. 26 U.S. Code 3406 – Backup Withholding
A Missing or Wrong Taxpayer ID Number
The most common reason. If you never gave the payer a Social Security Number, EIN, or ITIN, or the one you gave was wrong, or the name and number together don’t match IRS records, the payer must start withholding.2Internal Revenue Service. Backup Withholding This usually traces back to a Form W-9 that was skipped, rushed, or filled in with a typo when you opened the account or started the engagement.
If you don’t have a TIN yet, you can write “Applied For” on the W-9. For interest and dividend accounts that buys you 60 calendar days before withholding starts. For other payments, like independent contractor income, there’s no grace period: withholding applies immediately until you supply a valid number.3Internal Revenue Service. Instructions for the Requester of Form W-9
IRS Notice That Your TIN Doesn’t Match
Twice a year, in October and the following April, the IRS sends payers CP2100 or CP2100A notices listing accounts whose name and TIN combinations don’t match agency records.4Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice Your payer then contacts you with a “B Notice.” You may be certain your number is right and still land here, because the mismatch can be on the Social Security Administration’s side.
Underreported Interest or Dividends
If the IRS has determined you left interest or dividend income off a prior return, it can order your payers to start withholding on future interest and dividend payments. This trigger is limited to those two income types. Contractor pay, royalties, and other categories are not affected by it.1Office of the Law Revision Counsel. 26 U.S. Code 3406 – Backup Withholding
Failing to Certify on the W-9
Signing a W-9 is a sworn certification that you’re not currently subject to backup withholding for underreporting. If the IRS has told you that you are, you have to cross out that certification line. Not certifying properly is itself a separate trigger.5Internal Revenue Service. Form W-9 (Rev. March 2024) Request for Taxpayer Identification Number and Certification
The B Notice Your Payer Sends
When the IRS flags your TIN, the payer doesn’t start deducting without warning. You get a letter called a B Notice, and what you need to send back depends on whether it’s the first or the second one within a three-year window.
A First B Notice is usually a quick fix: complete and sign a new Form W-9 with the correct information and return it to the payer. If the problem was a typo or stale data, that resolves it.6Internal Revenue Service. Backup Withholding “B” Program
A Second B Notice, issued if you show up on a CP2100 or CP2100A again within three years, demands more. A fresh W-9 alone is not enough. For a Social Security Number, you need to send a copy of your Social Security card. For an EIN, you need Letter 147C from the IRS confirming the name and number on file.6Internal Revenue Service. Backup Withholding “B” Program If the mismatch is because the Social Security Administration still has your maiden name or an old spelling, you have to visit a local SSA office and correct their records before anything else will stick.
How to Stop It
The fix depends on which trigger put you here. Pick the wrong fix and the deductions keep coming.
If It’s a TIN Problem
Send the payer a properly completed Form W-9 with your correct TIN. For a First B Notice, that’s all you need. For a Second B Notice, include your Social Security card copy or IRS Letter 147C.6Internal Revenue Service. Backup Withholding “B” Program If the name on file at the Social Security Administration is wrong or outdated, fix it with SSA first and then confirm the correction with the payer.
Once the payer has the corrected information, the regulations require backup withholding to stop within 30 calendar days.7eCFR. 26 CFR 31.3406(d)-5 – Backup Withholding When the Service or a Broker Notifies the Payor
If It’s an Underreporting Issue
This one you resolve with the IRS directly, not with the payer. Usually that means filing an amended return to report the income the IRS says you missed and paying any tax due, or responding to the specific notice to explain why your original return was correct. Once the IRS is satisfied, it notifies your payers to stop. You can also request a determination from the IRS that the underreporting has been corrected.2Internal Revenue Service. Backup Withholding
Getting the Money Back at Tax Time
Everything withheld is a prepayment of your federal income tax, not a fine. The amount shows up on the Form 1099 or W-2G the payer sends you, in the “Federal income tax withheld” box.2Internal Revenue Service. Backup Withholding You report it on your Form 1040 alongside any other withholding, and it reduces your tax dollar for dollar. If the total you’ve had withheld exceeds what you owe for the year, the excess comes back as a refund. The catch is simple: you have to actually file for the year the income was received. No return, no credit.
Which Payments Are Affected
Backup withholding reaches most income reported on Forms 1099 and W-2G. The common categories are interest (1099-INT), dividends (1099-DIV), nonemployee compensation such as independent contractor pay (1099-NEC), royalties and rents (1099-MISC), broker and barter transactions (1099-B), payment card and third-party network transactions (1099-K), and gambling winnings (W-2G), where the 2026 reporting and withholding threshold is $2,000.2Internal Revenue Service. Backup Withholding8Internal Revenue Service. Instructions for Forms W-2G and 5754
A number of payment types are specifically excluded even though they appear on information returns: real estate transactions, cancelled debts, retirement account distributions, foreclosures and abandonments, unemployment compensation, and distributions from Archer MSAs or employee stock ownership plans.2Internal Revenue Service. Backup Withholding Wages on a W-2 are not subject to backup withholding either; they have their own withholding system.