Federal backup withholding is a flat 24% tax that a business or financial institution must subtract from certain non-wage payments and send directly to the IRS when the recipient’s tax information is missing, wrong, or flagged. It shows up on payments normally reported on 1099 forms, such as independent contractor pay, interest, dividends, and royalties. For the person on the receiving end, the money isn’t lost. It’s a prepayment of income tax that you reconcile when you file your return, much like withholding from a paycheck.
The 24% rate is set by statute at the fourth-lowest income tax bracket rate.1Office of the Law Revision Counsel. 26 US Code 3406 – Backup Withholding It comes off the top of the gross payment before you see the money, and the payer remits it to the Treasury on your behalf.
What Payments Are Covered
Backup withholding can apply to most payments reported on 1099 forms:2Internal Revenue Service. Backup Withholding
- Interest reported on Form 1099-INT
- Dividends reported on Form 1099-DIV
- Non-employee compensation, including independent contractor pay and attorney’s fees, on Form 1099-NEC
- Rents, royalties, and other income on Form 1099-MISC
- Broker and barter exchange proceeds on Form 1099-B
- Payment card and third-party network transactions on Form 1099-K
- Certain government payments on Form 1099-G
- Gambling winnings on Form W-2G
Real estate transactions are one notable exception. They’re reported on Form 1099-S, but they are not subject to backup withholding.2Internal Revenue Service. Backup Withholding If you’re selling property, the closing agent won’t apply the 24% deduction even if there’s a TIN issue.
The Role of Form W-9
Form W-9 is the front line of the system. When a business hires you as a contractor, opens an interest-bearing account for you, or otherwise plans to make a reportable payment, it asks you to fill out a W-9 giving your name, taxpayer identification number (a Social Security number for individuals, or an EIN for businesses), and a signed certification that the number is correct.3Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification
A properly completed W-9 is your shield. Without one, or with a flawed one, the payer is required to start withholding at 24%. When you sign the W-9, you’re also certifying under penalty of perjury that you are not currently subject to backup withholding for underreported income. If that certification is false, or you refuse to make it, that’s a separate trigger on its own.1Office of the Law Revision Counsel. 26 US Code 3406 – Backup Withholding
What Triggers Backup Withholding
Federal law spells out four triggers. In practice, two of them account for almost every case.
A Missing or Incorrect Taxpayer ID
The most common trigger is not having a correct TIN on file. If a payee never returns the W-9, leaves the TIN blank, or provides a number with the wrong number of digits, the payer must begin withholding immediately, starting with the first payment. There is no grace period.
The more common scenario in ongoing relationships is a mismatch. The IRS periodically compares the name-and-TIN combinations reported on 1099 forms against its own records, and when it finds a mismatch, it sends the payer a CP2100 or CP2100A notice listing each affected payee.4Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice The payer then sends the payee a “B” notice, a letter explaining the discrepancy and including a fresh Form W-9. The payee has 30 business days from the date of the CP2100 notice to provide a corrected TIN. Miss that window and the payer must start withholding at 24%.
IRS Notice of Underreported Interest or Dividends
The second trigger comes when the IRS determines that a taxpayer underreported interest or dividend income on a prior return. Before instructing any payer to withhold, the IRS sends the taxpayer at least four notices over a period of at least 120 days.5eCFR. 26 CFR 35a.3406-2 – Imposition of Backup Withholding for Notified Payee Underreporting Only after that period expires without resolution does the IRS direct payers to begin withholding.
This trigger works differently from a TIN problem. The payer cannot stop just because you hand them a fresh W-9. The withholding order came from the IRS, and only the IRS can lift it in writing.
Who Is Exempt
Certain payees are exempt from backup withholding and indicate that status by entering a code on line 4 of Form W-9. The main exempt categories are corporations (most C-corps and S-corps), tax-exempt organizations under Section 501(a), federal, state, and local government entities, foreign governments, financial institutions, registered securities dealers, real estate investment trusts, and registered investment companies.
Individuals and sole proprietors are not exempt. If you’re a freelancer or independent contractor operating under your own Social Security number, you cannot claim exempt status on the W-9. Your protection is limited to providing a correct TIN and staying current on your reporting.6Internal Revenue Service. Instructions for the Requester of Form W-9
The 2026 Reporting Threshold Changes
Starting with tax year 2026, the minimum reporting threshold for several 1099 payment types rose from $600 to $2,000. Because backup withholding generally follows the reporting rules, a payment that falls below the reporting threshold is generally not subject to backup withholding either.7Internal Revenue Service. Publication 1099 General Instructions for Certain Information Returns – 2026
The new $2,000 threshold applies to:
- Non-employee compensation on Form 1099-NEC (previously $600)
- Rents on Form 1099-MISC (previously $600)
- Certain government payments on Form 1099-G, including paid family leave and taxable grants
- Gambling winnings on Form W-2G, for reporting and backup withholding
Not every threshold moved. Interest, dividends, and royalties still trigger reporting at just $10.7Internal Revenue Service. Publication 1099 General Instructions for Certain Information Returns – 2026 The new $2,000 figure will be adjusted for inflation starting in 2027. If you hire freelancers, this means you generally don’t have to issue a 1099-NEC, or worry about backup withholding, for contractors you pay less than $2,000 in the calendar year.
How to Stop Backup Withholding Once It Starts
How you make it stop depends entirely on why it started. Using the wrong approach wastes time.
After a First B Notice
If withholding started because of a missing or mismatched TIN, you fix it by providing a corrected, certified Form W-9 to the payer. The name on the form must exactly match the name on file with the Social Security Administration (for an SSN) or the IRS (for an EIN). Once the payer has the corrected W-9, they must stop withholding within 30 calendar days.4Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
After a Second B Notice
If the same TIN shows up on a CP2100 or CP2100A notice a second time within three years, a new W-9 alone will not resolve it. The payee must produce either the actual Social Security card (for an SSN) or a Letter 147C from the IRS confirming the correct name-and-number combination (for an EIN).8Internal Revenue Service. Backup Withholding “B” Program Getting a Letter 147C requires contacting the IRS directly and can take time, so act quickly.
After an IRS Underreporting Directive
When the IRS ordered withholding because of underreported interest or dividends, you cannot resolve it by giving the payer a new form. You have to work with the IRS directly, and you can make your case in one of four ways:5eCFR. 26 CFR 35a.3406-2 – Imposition of Backup Withholding for Notified Payee Underreporting
- Show there was no underreporting in the first place.
- Correct the underreporting by filing amended returns (Form 1040-X) and paying any tax, penalties, and interest owed.
- Demonstrate undue hardship and that future underreporting is unlikely.
- Establish a bona fide dispute about whether underreporting occurred.
If the IRS accepts your position, it issues a written certification that backup withholding should stop. The timing depends on the basis. If you showed no underreporting or proved hardship, the IRS generally issues the certification within 45 days of its determination. If you corrected the underreporting or established a bona fide dispute, the IRS follows an annual cycle and issues the certification by December 1, with withholding typically ending on the following January 1 or 30 days after the payer receives the notice, whichever is later.5eCFR. 26 CFR 35a.3406-2 – Imposition of Backup Withholding for Notified Payee Underreporting
Deliver a copy of the IRS certification to every payer currently withholding. Each one is then required to stop the 24% deduction within 30 days.
Getting the Withheld Money Back
Backup withholding is a tax prepayment, not a penalty. You recover it by claiming the total withheld as a credit on your annual income tax return. Look at the 1099 you receive from the payer: the amount in the federal income tax withheld box is your credit on Form 1040. If the total withheld exceeds your actual tax liability for the year, you get the excess back as a refund. If it falls short, you owe the difference. Either way, the amount counts dollar-for-dollar against what you owe, just like payroll withholding.
A Few Situations With Their Own Rules
Foreign Payees
The W-9 system is built for U.S. persons. If you’re a nonresident alien receiving U.S.-source income like interest, dividends, royalties, or broker proceeds, you provide Form W-8BEN instead of a W-9 to establish your foreign status and claim any applicable treaty benefits.9Internal Revenue Service. Instructions for Form W-8BEN A properly submitted W-8BEN generally exempts you from backup withholding, though the payment may still be subject to the separate 30% Chapter 3 withholding or a reduced treaty rate. Failing to provide a W-8BEN when requested can result in backup withholding at 24% stacked on top of Chapter 3 withholding. If your status later changes and you become a U.S. resident, replace the W-8BEN with a W-9.
Gambling Winnings
Gambling has its own withholding layer that interacts with backup withholding. Regular gambling withholding at 24% applies to winnings from lotteries, sweepstakes, wagering pools, and sports bets when the net winnings exceed $5,000 and are at least 300 times the wager.10Internal Revenue Service. Instructions for Forms W-2G and 5754 If regular withholding applies, backup withholding does not also apply. It’s one or the other.
Backup withholding enters the picture for gambling winnings that meet the reporting threshold but fall below the regular withholding threshold. A sports bet that pays enough to trigger a Form W-2G but nets less than $5,000 would normally have no withholding, but if the winner doesn’t provide a TIN, backup withholding at 24% kicks in. Bingo, keno, and slot machine winnings are never subject to regular gambling withholding, but they are subject to backup withholding when the winner refuses to provide a TIN and the winnings meet the reporting threshold. Poker tournament winnings work similarly: no regular withholding when the operator files the W-2G, but backup withholding applies to the full winning amount if the winner won’t provide a TIN.