What Backup Withholding Means and How It Works

Backup withholding is a flat 24% federal tax that a payer must subtract from certain non-wage payments to you when there is a problem with your taxpayer information or the IRS has flagged prior underreporting. It applies to income like interest, dividends, and freelance pay, and it is not tied to your tax bracket. The money is not a penalty. It is a prepayment of your income tax that the IRS holds until you file your return.¹

The rate comes from Internal Revenue Code Section 3406 and is calculated on the gross payment before any fees or deductions. Congress locked the 24% figure in through P.L. 119-21, which extended the individual brackets set by the 2017 Tax Cuts and Jobs Act.²

Why a Payer Would Start Withholding From You

Four situations require a payer to begin taking 24% off the top:²

You failed to give the payer a Taxpayer Identification Number, meaning your Social Security Number, Employer Identification Number, or Individual Taxpayer Identification Number.
The IRS told the payer that the name and TIN you provided do not match its records.
The IRS determined that you failed to report interest or dividend income on a prior return.
You did not certify on Form W-9 that you are not subject to backup withholding.

The name-mismatch situation usually reaches you as a “B” notice from the payer, prompted by a CP2100 or CP2100A notice the IRS sent them. The first time it happens, a corrected Form W-9 fixes it. If the same mismatch appears again within three years, you have to back up your W-9 with a copy of your Social Security card or, for an EIN, an IRS Letter 147C.³

Underreporting works differently. Before withholding starts, the IRS sends you at least four notices over a period of at least 120 days asking you to correct the problem.⁴

Which Payments Are Subject to It

Backup withholding attaches to the kinds of income that get reported on a Form 1099. The most common categories are:¹

Interest, reported on Form 1099-INT.
Dividends, reported on Form 1099-DIV.
Freelance, contract, rent, royalty, and commission payments, reported on Form 1099-NEC or 1099-MISC.
Third-party payment network transactions, reported on Form 1099-K.
Certain gambling winnings that appear on information returns.
Fishing boat proceeds.

Starting in 2026, the reporting threshold for most freelance and miscellaneous income under Sections 6041(a) and 6041A(a) rose from $600 to $2,000, and backup withholding only applies to payments that are actually reportable.⁵ For third-party payment networks, backup withholding generally applies only when total payments to a payee exceed $20,000 and the transactions exceed 200 in a calendar year.⁶

Several kinds of payments are never subject to backup withholding, no matter what is on file:¹

Distributions from IRAs, 401(k) plans, and employee stock ownership plans.
Real estate transactions.
Cancelled debts.
Unemployment compensation.
State or local income tax refunds.
Qualified tuition program earnings (529 plans).
Long-term care benefits.

Certain payees are also exempt as a class. Corporations, government agencies, tax-exempt organizations, registered securities dealers, real estate investment trusts, and financial institutions generally do not face backup withholding, and they signal that status with an exemption code on Form W-9.⁷

How to Stop It

The standard fix is Form W-9. You complete it with your legal name as it appears on your tax return, your TIN, and a signature under penalties of perjury certifying the information is correct and that you are not subject to backup withholding for underreporting. You send it to the payer, not the IRS. Electronic submissions work as long as the signature identifies you, authenticates the submission, and appears as the final entry after the perjury statement.⁸⁹

Once the payer has your valid W-9 or other required documentation, they have up to 30 calendar days to turn the withholding off. Some payers will keep withholding during that window, but it must end by day 30.¹⁰

Getting the Money Back at Tax Time

Backup withholding is not lost money. The amount taken appears in box 4 of the Form 1099 you receive from the payer. When you file, you report the total on Form 1040, Line 25b, as federal income tax withheld from Forms 1099. It reduces your tax bill dollar for dollar, or it grows your refund. If your actual bracket is 10% or 12%, you will get most of the 24% back. In a higher bracket, you may still owe more.¹¹¹

Partners in a partnership and shareholders in an S corporation handle it individually. Backup withholding taken from the entity’s payments cannot be claimed by the entity. Each partner or shareholder reports their share on their own return.¹²

If You Are a Nonresident Alien or Foreign Entity

Backup withholding generally does not apply to foreign persons, but a separate 30% withholding on U.S.-source income under chapters 3 and 4 of the Internal Revenue Code often does. Instead of Form W-9, foreign individuals use Form W-8BEN to certify foreign status and claim any reduced treaty rate. Foreign entities use Form W-8BEN-E, foreign intermediaries use Form W-8IMY, and nonresident aliens with U.S. business-connected income use Form W-8ECI. Failing to file the right W-8 when asked can trigger the 30% rate, the backup withholding rate, or both, depending on the payment.¹³

1
Internal Revenue Service. Backup Withholding
2
Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding
3
Internal Revenue Service. Backup Withholding “B” Program
4
Internal Revenue Service. Backup Withholding “C” Program
5
Internal Revenue Service. Publication 15 (2025), (Circular E), Employer’s Tax Guide
6
Internal Revenue Service. Treasury, IRS Issue Proposed Regulations Reflecting Changes From the One, Big, Beautiful Bill to the Threshold for Backup Withholding on Certain Payments Made Through Third Parties
7
Internal Revenue Service. Instructions for the Requester of Form W-9
8
Internal Revenue Service. Instructions for the Requester of Form W-9
9
Internal Revenue Service. The Internal Revenue Service Will Permit Electronic Submission of Forms W-9 and W-9S
10
Internal Revenue Service. 5.19.3 Backup Withholding Program
11
Internal Revenue Service. Instructions for Form 1040
12
Internal Revenue Service. Topic No. 307, Backup Withholding
13
Internal Revenue Service. Instructions for Form W-8BEN