Backup withholding tax is a flat 24% that a payer must subtract from certain payments to you — things like interest, dividends, and freelance income reported on a Form 1099 — when your taxpayer information is missing or incorrect, or when the IRS has flagged you for underreporting interest or dividends in the past. It isn’t an extra tax. The money is forwarded to the IRS and counts as federal income tax already paid, so you claim it back when you file. But until then, your cash is tied up.
Why Backup Withholding Is Being Taken From Your Payments
Four situations force a payer to start withholding 24%.
The most common one is a missing Taxpayer Identification Number. If you left the TIN (usually your Social Security number) blank on an account application, or you never returned a Form W-9 when a client asked, the payer has no choice. Withholding starts right away.1Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding A number that isn’t nine digits, or that contains non-numeric characters, counts as missing.
The second trigger is a TIN mismatch. When the name-and-number combination you gave doesn’t match IRS or Social Security Administration records, the IRS sends the payer a CP2100 or CP2100A notice listing the problem accounts. The payer then sends you a “B notice” asking you to fix the information. If you don’t respond within 30 days, withholding begins.2Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
The third trigger is underreporting interest or dividend income. Before the IRS tells your bank or brokerage to start withholding, it mails you at least four notices over a minimum of 120 days. Only after that notice period, and after assessing any tax deficiency, does the IRS instruct payers to begin withholding.1Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding This is where people get blindsided. They ignore what looks like routine IRS mail, and months later their bank starts pulling 24% from every interest payment.
The fourth is a certification failure. When you open an account that will earn interest or dividends, your W-9 asks you to certify you aren’t currently subject to backup withholding for prior underreporting. Skip that certification and withholding applies.3Internal Revenue Service. Topic No. 307, Backup Withholding
Which Payments Are Covered
Backup withholding can hit most types of income reported on a Form 1099. The everyday ones are bank interest (Form 1099-INT), stock dividends (Form 1099-DIV), and freelance or contractor payments (Form 1099-NEC). Rents, royalties, and other miscellaneous payments on Form 1099-MISC are covered too.3Internal Revenue Service. Topic No. 307, Backup Withholding
The reach goes further than most people expect. Broker proceeds and barter exchange transactions (Form 1099-B), certain government payments (Form 1099-G), patronage dividends where at least half is cash (Form 1099-PATR), original issue discount (Form 1099-OID), gambling winnings not already subject to regular withholding (Form W-2G), and payment card or third-party network transactions (Form 1099-K) can all be subject to it.3Internal Revenue Service. Topic No. 307, Backup Withholding
For payments through a platform like a payment app or online marketplace, proposed 2026 regulations generally do not require third-party settlement organizations to backup withhold unless payments to you exceed $20,000 and involve more than 200 transactions in a calendar year.4Internal 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
Crypto is now on the list. Starting with sales after 2025, digital asset brokers report transactions on the new Form 1099-DA. If you haven’t given the broker a valid TIN, backup withholding applies, and any amount withheld shows up in Box 4 of that form.5Internal Revenue Service. 2026 Instructions for Form 1099-DA Digital Asset Proceeds From Broker Transactions
What Is Exempt
Several types of payments are carved out entirely: retirement account distributions, real estate transactions, cancelled debts, unemployment compensation, state and local tax refunds, and distributions from qualified tuition programs.6Internal Revenue Service. Backup Withholding If your income comes from one of these, backup withholding isn’t a concern regardless of your TIN situation.
Certain payees are also exempt no matter the payment type. Corporations, tax-exempt organizations, government entities, registered securities dealers, real estate investment trusts, registered investment companies, and financial institutions signal their status with an exempt payee code on Form W-9.7Internal Revenue Service. Instructions for the Requester of Form W-9
Nonresident aliens aren’t in this regime at all. Foreign individuals and entities file a Form W-8BEN (or another W-8) instead of a W-9 to certify foreign status. A separate 30% withholding may apply under different rules, but that isn’t backup withholding.8Internal Revenue Service. Tax Withholding Types
How to Stop It or Keep It From Starting
The fix depends on what set it off.
If the problem is a missing or incorrect TIN, submit a correctly completed Form W-9 to the payer with your legal name and accurate TIN, signed under penalties of perjury.6Internal Revenue Service. Backup Withholding Once the payer has a valid W-9 on file, withholding stops on future payments. It does not refund what was already withheld; you’ll recover that on your tax return.
If the trigger was underreporting interest or dividends, the path is harder. You have to resolve the underlying problem with the IRS, which could mean filing a missing return, reporting the income you left off, and paying any tax owed along with penalties and interest. The IRS then provides you a written certification that withholding should stop and notifies your payers directly.1Office of the Law Revision Counsel. 26 USC 3406 – Backup Withholding You can also ask the IRS to stop the withholding if it’s causing undue hardship, if there was no actual underreporting, or if there’s a genuine dispute about whether underreporting occurred.
Do not shortcut the certification. Willfully providing false information on a W-9, such as certifying you are not subject to backup withholding when you know you are, carries criminal penalties of up to $1,000 in fines, up to one year in prison, or both.9Office of the Law Revision Counsel. 26 USC 7205 – Fraudulent Withholding Exemption Certificate or Failure to Supply Information On the civil side, failing to furnish your TIN when a payer requests it can cost $50 per failure, up to $100,000 per year.10Office of the Law Revision Counsel. 26 USC 6723 – Failure to Comply With Other Information Reporting Requirements
Getting the Withheld Money Back
Backup withholding isn’t lost. After the tax year ends, your payer sends you a Form 1099 showing the total in Box 4. You report that amount on Line 25b of Form 1040 as federal income tax already paid during the year.11Internal Revenue Service. 2025 Instructions for Form 1040 It reduces your total tax bill dollar for dollar, and if the withholding is more than you owe, the excess comes back as a refund.
If your payer didn’t send a 1099, or you can’t find it, you can still claim the credit. Report the income and the withholding based on your own records. The IRS already has the money in its system from the payer’s deposits, so the credit should reconcile even without the form in hand.
Partnerships and S corporations should note one wrinkle: backup withholding on payments to these entities cannot be refunded to the entity. Each partner or shareholder claims their share of the withholding on their personal Form 1040.3Internal Revenue Service. Topic No. 307, Backup Withholding
If You’re the One Making Payments
Businesses that pay independent contractors, interest, dividends, or other 1099 income have their own obligations. When the IRS sends a CP2100 or CP2100A notice flagging accounts with TIN problems, compare it against your records, send a B notice to affected payees, and begin withholding on the timeline the IRS sets: immediately for missing or obviously incorrect TINs, and 30 days after the notice for uncorrected mismatches.2Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
Withheld amounts are deposited through the Electronic Federal Tax Payment System on a monthly or semiweekly schedule and reported at year-end on Form 945, the annual return for withheld federal income tax on nonpayroll payments. File only one Form 945 per calendar year covering all your backup withholding.12Internal Revenue Service. Instructions for Form 945 A payer who should have withheld but didn’t can be held responsible for the amounts, and the correct move once you notice the obligation is to start withholding immediately.13Internal Revenue Service. Backup Withholding “B” Program Payments to your incorporated vendors generally don’t require backup withholding; payments to unincorporated contractors who haven’t given you a valid W-9 do.