If a contractor refuses to provide a W-9, federal law requires you to withhold 24% of every payment you make to that person and send it to the IRS as backup withholding. The obligation is not optional. Keep requesting the form in writing, start the 24% withholding on the next payment, deposit those funds with the Treasury on schedule, and document every step. If you skip the withholding, your business becomes liable for the tax the contractor should have paid.
Ask Again, in Writing, Before You Pay
Your strongest leverage is timing. The IRS expects you to solicit the taxpayer identification number (TIN) when you first engage a contractor, and the simplest way to enforce that is to hold payment until the W-9 arrives.1Internal Revenue Service. Instructions for the Requester of Form W-9 No W-9, no check. Most contractors who initially balk will comply once they realize the money isn’t moving without it.
If the contractor still refuses after that first request, you need to keep soliciting. The IRS looks for annual follow-up requests when a TIN remains missing. Each solicitation can be in writing, by phone, or electronically, but document everything: copies of every request, dates and method of contact, and any responses. That paper trail is what separates a business that acted responsibly from one the IRS penalizes for sloppy recordkeeping.
Nothing forces you to keep working with someone who won’t cooperate. You can end the relationship and find another contractor. And federal law actually requires the contractor to furnish a TIN when you properly request it, so the obligation runs both directions.
Start Backup Withholding at 24%
Once you’ve made a reasonable effort to get the W-9 and the TIN still isn’t in hand, backup withholding starts. Deduct 24% from every payment going forward and send it to the IRS.2Internal Revenue Service. Backup Withholding The rate is set by statute and tied to the fourth-lowest individual income tax bracket.3Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding
The math is straightforward. On a $10,000 payment, the contractor gets $7,600 and you hold back $2,400. On a $3,000 invoice, they get $2,280. The withholding continues on every payment for as long as the TIN is missing. The contractor can stop it at any time by turning in a completed W-9.
Backup withholding is not a penalty against the contractor. It’s a collection mechanism, and the withheld amount becomes a credit on the contractor’s personal return, so it isn’t lost to them. But for your business, the obligation is absolute. Even if the contractor complains that the deduction is unfair or threatens to walk, keep withholding. The alternative is far worse.
Deposit the Money and File Form 945
Money you withhold is not your money. It’s held in trust for the federal government and must be deposited with the U.S. Treasury on schedule. Report the total backup withholding collected during the year on Form 945, Annual Return of Withheld Federal Income Tax, which is due January 31 of the following year.4Internal Revenue Service. About Form 945, Annual Return of Withheld Federal Income Tax
Your deposit schedule depends on how much you withhold. Smaller liabilities deposit monthly; larger ones follow a semiweekly schedule. If total liability hits $100,000 or more on a single day, you must deposit by the next business day. Late deposits carry tiered penalties:
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5% of the unpaid deposit
- More than 15 days late: 10% of the unpaid deposit
- More than 10 days after an IRS notice: 15% of the unpaid deposit
These percentages apply even if you file Form 945 on time. Depositing and filing are separate obligations with separate penalties.5Internal Revenue Service. Failure to Deposit Penalty
Issue the 1099-NEC With What You Have
At year-end you still issue Form 1099-NEC to the contractor. Report the gross amount paid in Box 1 and the federal income tax withheld in Box 4. If the contractor never provided a TIN, leave that field blank and note the refusal in your records. The contractor uses the Box 4 figure as a credit on their personal return.
Filing a 1099-NEC with a missing TIN triggers an information return penalty, but that is the penalty documentation can help with (see below). It is not a reason to delay filing.
What Refusing Costs the Contractor
The contractor isn’t just creating a headache for you. Federal law requires anyone who receives a proper request for a TIN to provide it. A contractor who refuses faces a $50 penalty for each failure, up to $100,000 in a single calendar year.6Office of the Law Revision Counsel. 26 USC 6723 – Failure to Comply With Other Information Reporting Requirements They also lose access to 24% of their income throughout the year and have to wait until tax time to claim it back.
Sharing these consequences with a reluctant contractor sometimes breaks the impasse. Many refuse a W-9 because they’re worried about the tax hit, not realizing they’ll owe the same tax either way. The only question is whether they control the timing or the IRS does.
What It Costs You if You Don’t Withhold
This is where businesses get into serious trouble. If you knew the TIN was missing and you kept paying the full amount, the IRS holds you personally responsible for the 24% that should have come out. You pay it out of your own pocket, on top of the full contract amount you already paid the contractor.7Internal Revenue Service. Fast Facts to Help Taxpayers Understand Backup Withholding
The exposure stacks from several directions:
- Failure-to-withhold liability: the full 24% you should have withheld, treated as an underpayment of federal tax.
- Failure-to-deposit penalties: 2% to 15% of the undeposited amount, depending on how late the funds are.5Internal Revenue Service. Failure to Deposit Penalty
- Information return penalties for 2026: $60 per return up to 30 days late, $130 if corrected by August 1, $340 if later or not filed, and $680 per return for intentional disregard.8Internal Revenue Service. Information Return Penalties
- Personal liability: because withheld funds are trust fund taxes, responsible individuals inside the business can be held personally liable for the full amount under the trust fund recovery penalty, even if the business itself can’t pay.9Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax
That last point catches people off guard. The trust fund recovery penalty doesn’t just hit the business entity. It can reach any person inside the organization who had the authority and responsibility to collect and remit the withholding. For a small business owner, that’s almost always you personally.
Documentation That Can Reduce the Return Penalty
If a contractor simply won’t cooperate no matter what you do, thorough records can qualify you for reasonable cause relief on the missing-TIN information return penalty. Keep copies of every W-9 request, email exchanges, certified mail receipts, and dated notes of phone conversations, and show that you solicited the TIN initially and followed up at least annually.8Internal Revenue Service. Information Return Penalties
Reasonable cause protects against the per-return penalty for a missing TIN. It does not excuse you from performing the backup withholding itself. There is no reasonable cause exception for skipping the 24%. Start the withholding, document your solicitation efforts, and let the paper trail protect you where it can.
When Credit Card and Third-Party Payments Change the Answer
If you pay a contractor through a credit card, debit card, or a third-party network like PayPal or Venmo, the reporting responsibility shifts. Those payments get reported on Form 1099-K by the payment settlement entity, not on Form 1099-NEC by you.10Internal Revenue Service. Instructions for Forms 1099-MISC and 1099-NEC The payment processor also handles any backup withholding for those transactions.
If every dollar you pay the contractor moves through a card or third-party network, you generally don’t file a 1099-NEC for those payments and the withholding burden falls on the processor. But if you pay the same contractor partly by check and partly by Venmo, you’re still on the hook for backup withholding on the check portion. Keep clean records of which payments went through which channels.