What Is Backup Withholding? Rate, Exemptions, and Refunds

Backup withholding is a flat 24% federal income tax that certain payers must deduct from your 1099-type payments and send directly to the IRS when your taxpayer identification number is missing or wrong, or when the IRS has told the payer you underreported interest or dividends. It isn’t a penalty and it isn’t an extra tax. It’s a prepayment credited against what you owe when you file your return.

What Triggers It

Four situations require a payer to start withholding 24% from your payments:¹

You never gave the payer your Social Security number, EIN, or ITIN.
The IRS told the payer that the number you provided doesn’t match its records.
The IRS determined you underreported interest or dividend income on a past return and notified the payer.
You refused to certify, when opening an account or starting a business relationship, that you aren’t subject to backup withholding.

The IRS flags TIN problems through a CP2100 or CP2100A notice, which goes to the payer, not to you. That notice lists every payee whose name-and-number combination didn’t match IRS records or whose TIN was missing or obviously wrong. Once the payer gets it, the payer must send you a “B-notice” asking you to fix the problem. If you don’t respond, withholding begins.²

Which Payments Are Covered

Backup withholding reaches most income reported on 1099 forms and Form W-2G:³p>

Interest on bank accounts, bonds, and other interest-bearing instruments (Form 1099-INT)
Dividends, including capital gain distributions (Form 1099-DIV)
Non-employee compensation such as commissions and contractor fees (Form 1099-NEC)
Rents, royalties, and other gains (Form 1099-MISC)
Broker and barter exchange transactions (Form 1099-B)
Payment card and third-party network transactions (Form 1099-K)
Attorney fees and legal settlements (Form 1099-NEC or 1099-MISC)
Patronage dividends, if at least half the payment is in cash (Form 1099-PATR)
Gambling winnings (Form W-2G)
Original issue discount, if paid in cash (Form 1099-OID)
Certain government payments (Form 1099-G)

The reporting threshold matters, because backup withholding only applies to payments that are reportable in the first place. For 2026, the aggregate reporting threshold for many payments (such as non-employee compensation and rents) rose from $600 to $2,000 under P.L. 119-21, the One Big Beautiful Bill Act. A single $1,500 contractor payment in a calendar year may no longer require an information return or trigger backup withholding. The $2,000 figure will adjust for inflation in future years.⁴

Interest and dividends keep their own, lower thresholds. Generally $10 for dividends and $10 for most interest, so those are still reportable at small amounts and remain subject to backup withholding when TIN problems exist.⁵ For certain gambling winnings on Form W-2G, the minimum reporting threshold in 2026 is also $2,000.⁶

How the 24% Rate Works

The rate is a flat 24% of the gross payment. On a $5,000 contractor payment, the payer sends $1,200 to the IRS and pays you $3,800. The rate doesn’t scale to your actual bracket. Someone in the 10% bracket and someone in the 37% bracket both lose 24% upfront.³ P.L. 119-21 permanently extended the individual rates from the Tax Cuts and Jobs Act, so the 24% backup withholding rate is locked in indefinitely rather than reverting to 28% after 2025.⁴

If your actual tax rate is below 24%, the difference comes back as a refund when you file. If it’s higher, you’ll still owe the gap. The 24% is a credit against your final liability, not a charge on top of it.

Who Is Exempt

Most individuals and sole proprietors are not exempt. If you’re a freelancer or gig worker, there’s no exemption code that applies to you. Your protection is providing a correct TIN and keeping your reporting current.

Corporations generally are exempt, but with real carve-outs: they still face backup withholding on attorney fees, payments settled through payment card or third-party network transactions, and medical or health care service payments reported on Form 1099-MISC.

Other exempt payees can claim the exemption by entering the appropriate code on Form W-9:

Tax-exempt organizations under Section 501(a), including IRAs and certain custodial accounts
Federal, state, local, and foreign governments and their agencies
Financial institutions as defined under Section 581
Securities and commodities dealers registered in the U.S.
Real estate investment trusts
Registered investment companies under the Investment Company Act of 1940
Common trust funds operated by banks
Futures commission merchants registered with the CFTC
Nominees and custodians in the investment community
Certain exempt trusts under Section 664 or described in Section 4947

Preventing It With Form W-9

Form W-9, “Request for Taxpayer Identification Number and Certification,” is how you give a payer what it needs to keep backup withholding off your payments.⁷ You provide your legal name, business name if different, entity type, address, and TIN, and certify under penalties of perjury that the TIN is correct and that you aren’t subject to backup withholding for underreporting. Submit it before or at the time of your first payment and the payer has no basis to withhold.

For accounts that will earn interest or dividends, the certification has an extra layer. You’re confirming you haven’t received an IRS notice telling you that you’re subject to backup withholding for underreporting those specific types of income. If you have received such a notice and haven’t resolved it, you can’t make that certification, and crossing out that line on the W-9 will itself trigger withholding.³

Payers can accept electronic W-9 submissions, including by fax. Any electronic system must verify the identity of the submitter, preserve the data exactly as submitted, include the same information as the paper version, and capture an electronic signature under penalties of perjury. If a particular W-9 doesn’t require a signature, the electronic system can skip the signature and perjury statement.⁸

Stopping It Once It’s Started

How you stop backup withholding depends on why it started, and on whether the current B-notice is your first or second from that payer.

A First B-Notice comes with a blank Form W-9. Return a properly completed and signed W-9 with your correct TIN. Once the payer receives it, the regulation gives the payer 30 calendar days to stop withholding.⁹

A Second B-Notice is more serious. You receive one if your account appears on a CP2100 or CP2100A notice twice within three years. A W-9 alone won’t resolve it. You must give the payer either a copy of your Social Security card or a Letter 147C from the IRS confirming that your name and EIN are correct. The IRS will issue Letter 147C on request; call the number on your notice or the general IRS business line.¹⁰

If withholding started because of underreported interest or dividends, a new W-9 won’t help. You have to resolve the reporting issue with the IRS directly, typically by filing amended returns or paying the additional tax owed, and the IRS will then notify the payer to stop.

Foreign Persons Follow a Different Regime

If you’re a nonresident alien or foreign entity, the 24% backup rate doesn’t apply to you. You provide Form W-8BEN instead of W-9, certifying foreign status.¹¹ The standard withholding rate on U.S.-source income paid to nonresident aliens is 30%, covering dividends, interest (with exceptions for bank interest and portfolio interest), royalties, non-employee compensation, pensions, and similar payments. Tax treaties can reduce that rate, sometimes to zero, and the foreign person claims the treaty rate on Form W-8BEN for investment income or Form 8233 for personal service income. These payments get reported on Forms 1042 and 1042-S rather than the 1099 series.¹²

Penalties for a False W-9

Providing a false TIN or making a false certification to avoid backup withholding carries a $500 civil penalty per occurrence. The IRS can waive it if your total tax liability for the year was already covered by credits and estimated payments, meaning no actual tax was lost.¹³

Willfully making false statements on tax documents can also draw criminal charges, with fines up to $100,000 and up to three years in prison. Those apply to deliberate fraud, not honest mistakes.

Getting the Withheld Money Back

Backup withholding isn’t lost. It’s sitting at the IRS as a prepayment of your federal income tax. Each payer that withheld from your payments must send you a Form 1099 showing the total backup withholding for the year. You report that amount as federal income tax withheld on your return, and it reduces your bill dollar for dollar or increases your refund.¹⁴

If a payer doesn’t send you a 1099, you still claim the credit. Contact the payer first. If you still haven’t received the form by the end of February, call the IRS at 800-829-1040. The IRS will contact the payer on your behalf and send you Form 4852, a substitute for a missing 1099-R or W-2. You estimate the amounts from your own records, such as bank statements or payment confirmations, and explain on the form how you arrived at the figures and what you did to try to get the original document.¹⁵

Form 4852 officially substitutes only for Forms W-2 and 1099-R. If you’re missing a 1099-MISC or 1099-NEC that showed backup withholding, report the income and withholding directly on your return using your own records. The IRS matches its records to your return, and as long as your figures line up with what the payer deposited, the credit should process without issue.

1
Office of the Law Revision Counsel. 26 USC 3406 – Requirement to Deduct and Withhold
2
Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
3
Internal Revenue Service. Backup Withholding
4
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
5
Internal Revenue Service. Instructions for Form 1099-DIV
6
Internal Revenue Service. Instructions for Forms W-2G and 5754
7
Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
8
Internal Revenue Service. Instructions for the Requester of Form W-9 (Rev. January 2026)
9
eCFR. 26 CFR 31.3406(e)-1 – Period During Which Backup Withholding Is Required
10
Internal Revenue Service. Backup Withholding “B” Program
11
Internal Revenue Service. About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)
12
Internal Revenue Service. Federal Income Tax Withholding and Reporting on Other Kinds of U.S. Source Income Paid to Nonresident Aliens
13
Office of the Law Revision Counsel. 26 USC 6682 – False Information With Respect to Withholding
14
Internal Revenue Service. Topic No. 307, Backup Withholding
15
Internal Revenue Service. Form 4852 Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R