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What Is Backup Withholding? Rate, Rules,
and When It Applies
What triggers 24% backup withholding, which payments it covers, how the B notice process works, and how
payers withhold, report, and stop it.
By Charles Hardy | Last updated: Oct 16, 2026
Key Insights: Backup withholding
- Backup withholding is a 24% federal withholding that applies to payments reported on certain 1099 forms, not to employee wages.
- It is generally triggered by a missing or incorrect TIN, or by an IRS notice (CP2100/CP2100A) telling the payer to withhold.
- The payer is responsible for withholding, depositing, and reporting it on Form 945 and in the federal income tax withheld box of the payee’s 1099.
What is backup withholding?
Backup withholding is federal income tax that a payer withholds from certain non-wage payments at a flat 24% and sends to the IRS. It applies when a payee’s taxpayer identification number (TIN) is missing or incorrect, or when the IRS tells the payer to withhold. The payee receives credit for the tax when filing a return.
Example: A business pays a contractor $5,000 and backup withholding applies. The business withholds $1,200 and pays the contractor $3,800. The contractor claims the $1,200 as tax already paid.
Backup withholding is not a penalty on the payee. It is a prepayment of income tax, so any amount withheld beyond what the payee owes
is refunded.
| Backup withholding | Regular wage withholding | |
|---|---|---|
| Applies to | Payees receiving 1099-reportable payments, such as contractors, landlords, and investors | Employees |
| When | Only when a TIN problem, IRS notice, or missing certification triggers it | On every paycheck |
| Rate | Flat 24% of the payment | Varies with Form W-4 and income |
| Reported on | Form 945 and the payee’s 1099 | Form 941 and the employee’s W-2 |
What triggers backup withholding?
Four conditions trigger backup withholding. Two come from the payer’s own review of the payee’s information, and two come from IRS notices.
| Trigger | What happened | When withholding starts | How the payer learns of it |
|---|---|---|---|
| Missing TIN | The payee did not provide a TIN, or provided one that is obviously incorrect, such as the wrong number of digits |
On reportable payments until a TIN is provided. For a payee who has applied for a TIN, interest and dividend payments get a 60-day window, and other payments are withheld immediately | The payer’s own review |
| Incorrect TIN | The IRS reports that the payee’s name and TIN do not match its records | No later than 30 business days after the notice date or the date received, whichever is later, if the payee has not corrected it | IRS notice (CP2100 or CP2100A) |
| Underreported income | The IRS reports that the payee underreported interest or dividends | When the IRS notice instructs, on interest and dividend payments | IRS notice |
| No certification | The payee did not certify on Form W-9 that they are not subject to backup withholding, where certification is required, such as interest and dividend accounts opened after 1983 | With the next reportable payment | The payer’s own review |
The IRS runs the incorrect-TIN trigger through its BWH-B program and the underreporting trigger through its BWH-C program. Under the C program, the payer withholds only after the IRS notifies it, and continues until the IRS says to stop.
Which payments are subject to backup withholding?
The rule follows the form. A payment reportable on one of these forms is generally covered.
| Payment | Reported on | Subject to backup withholding? |
|---|---|---|
| Nonemployee compensation, including attorney fees | 1099-NEC | Yes |
| Rents, royalties, medical payments, and other income | 1099-MISC | Yes |
| Interest | 1099-INT | Yes |
| Dividends | 1099-DIV | Yes |
| Broker proceeds and barter exchanges | 1099-B | Yes |
| Payment card and third-party network transactions | 1099-K | Yes |
| Patronage dividends paid at least half in cash | 1099-PATR | Yes |
| Gambling winnings not subject to regular gambling withholding | W-2G | Yes |
| Certain government payments, such as taxable grants and agricultural payments | 1099-G | Yes |
| Unemployment compensation and state tax refunds | 1099-G | No |
Backup withholding applies to reportable payments, meaning payments that meet the reporting threshold for the form. Once tax has been withheld from a payee, a 1099 is required for that payee regardless of the amount.
Payments excluded from backup withholding:
- Real estate transactions
- Foreclosures and abandonments
- Canceled debts
- Distributions from Archer MSAs
- Long-term care benefits
- Distributions from any retirement account, including pensions, annuities, and IRAs
- Distributions from an employee stock ownership plan
- Fish purchases for cash
- Unemployment compensation
- State or local income tax refunds
- Qualified tuition program earnings
The two IRS backup withholding programs: BWH-B and BWH-C
The IRS runs backup withholding through two programs, each tied to a different problem with a payee’s tax information.
| BWH-B program | BWH-C program | |
|---|---|---|
| Problem | Missing or incorrect TIN | Underreported interest or dividend income |
| How the payer learns of it | Its own review of the TIN, or an IRS B notice (CP2100 or CP2100A) after the IRS matches filed returns | An IRS notice that the payee is subject to backup withholding |
| Payments affected | Reportable payments to that payee | Interest and dividend payments only |
| When withholding starts | When the TIN is missing, or the payee does not correct a mismatch after the B notice process | After the IRS notifies the payer, and continuing until the IRS says to stop |
| How it stops | The payee provides a correct TIN on a signed Form W-9, or a validation after a second notice | The IRS notifies the payer to stop |
BWH-B: missing or incorrect TIN. The B program applies when a payee does not provide a correct taxpayer identification number for the information return the payer must file. The TIN is usually requested on Form W-9 and can be one of
the following:
- Social Security number (SSN)
- Employer identification number (EIN)
- Individual taxpayer identification number (ITIN)
When the TIN is missing, or the IRS reports through a B notice that it does not match IRS records and the payee does not correct it, the payer must withhold 24% from future reportable payments. This makes sure tax is collected when the payee’s details cannot be matched.
BWH-C: underreported interest or dividend income. The C program applies when the payee has:
- Failed to report, or underreported, interest or dividend income on their federal tax return
- Not certified that they are not subject to backup withholding for underreporting interest or dividends
Under the C program, the payer withholds only after the IRS notifies it that the payee is subject to backup withholding. From then on, the payer withholds 24% from the payee’s interest and dividend payments until the IRS says to stop.
Backup withholding requirements: Three steps for payers
The payer, not the payee, is responsible for backup withholding. A payer that fails to withhold when required can be held liable for the tax that should have been withheld, in addition to information return penalties.
Step 1: Collect and verify TINs before the first payment.
Most backup withholding is avoided at this step. A completed Form W-9 gives the payer the payee's name, tax classification, TIN, any exempt payee code, and the certification that the payee is not subject to backup withholding.
TaxBandits W-9 Manager moves this step online. Businesses can:
- Send W-9 requests by email, text, SmartCollect link, or QR code
- Let payees complete and e-sign the form from any device
- Validate each name and TIN against IRS records
Step 2: Withhold and deposit the tax.
When backup withholding applies, the payer withholds 24% of each reportable payment until the condition is resolved. The withheld tax is deposited through EFTPS on a monthly or semiweekly schedule. These deposits are kept separate from payroll taxes reported on
Form 941.
Step 3: Report the withholding.
The payer reports backup withholding in two places:
| Report | What it shows | Due for 2026 withholding |
|---|---|---|
| Form 945 | Total backup withholding for the year | February 1, 2027, or February 10, 2027, if all deposits were made on time |
| Form 1099 | The payment and the amount withheld, in the federal income tax withheld box (Box 4 on Forms 1099-NEC, 1099-MISC, 1099-INT, and 1099-DIV) | Same as the 1099's own due date |
January 31, 2027 falls on a Sunday, so the Form 945 deadline moves to February 1, 2027.
Learn more about 1099 deadlines and penalties.
TaxBandits simplifies the e-filing of Form 945, 1099-NEC, 1099-MISC, and other 1099 forms with the IRS and states, and handles the recipient copy distribution via postal mail or online.
How to stop backup withholding?
Backup withholding stops when the condition that triggered it is resolved. What the payee needs to provide depends on the reason it started.
| Reason it started | How it stops |
|---|---|
| Missing TIN | The payee provides a TIN on a signed Form W-9 |
| First B notice | The payee returns a signed Form W-9 with the correct name and TIN |
| Second B notice | The payee provides a validation of the name and TIN from the SSA or the IRS |
| Underreported interest or dividends | The IRS notifies the payer to stop, after the payee resolves the underreporting with the IRS |
| No certification | The payee signs the certification on Form W-9 |
Note: Amounts already withheld are not returned by the payer. The payee claims them as federal income tax withheld on their return, and any amount beyond what they owe
is refunded.
Who is exempt from backup withholding?
Exempt payees include corporations for most payment types, tax-exempt organizations, and government entities. A payee claims exemption by entering an exempt payee code on Form W-9. Learn more about completing Form W-9.
Corporations are not exempt for:
- Payment card and third-party network transactions
- Attorneys’ fees and gross proceeds paid to attorneys
- Medical and health care payments reportable on Form 1099-MISC
- Payments for services paid by a federal executive agency
Foreign payees who provide a valid Form W-8 are not subject to backup withholding. Their payments follow separate withholding rules. Learn more about 1099 for foreign contractors.
Frequently asked questions
Backup withholding is federal income tax withheld at 24% from certain 1099-reportable payments when the payee's TIN is missing or incorrect, or when the IRS instructs the payer to withhold.
The rate is 24% of the payment.
The payer. The payer withholds the tax, deposits it with the IRS, and reports it on Form 945 and the payee's 1099.
Yes. Payments to contractors reported on Form 1099-NEC are subject to backup withholding when a trigger applies.
No. Wages are subject to regular withholding based on Form W-4, not backup withholding.
A B notice is the notice a payer sends to a payee after the IRS reports, on Notice CP2100 or CP2100A, that the payee's name and TIN do not match IRS records.
If the payee does not correct the TIN, withholding generally starts no later than 30 business days after the payer receives the IRS notice.
Exempt payees include corporations for most payment types, tax-exempt organizations, and government entities. Payees claim exemption with an exempt payee code on Form W-9.
On Form 945 for the year's total, and in the federal income tax withheld box of each payee's 1099.
February 1, 2027, or February 10, 2027, if all backup withholding was deposited on time.
Yes, to the payee. Backup withholding counts as federal income tax paid, and any amount beyond the payee's tax liability is refunded when they file their return.
The payer can be held liable for the tax that should have been withheld, plus interest and penalties.
