IRS Backup Withholding: Rules and What to Expect

If you pay an independent contractor, you generally just cut them a check or send another type of payment, and then, at the end of the year, you give them a 1099 form noting their total payments for the year. Similarly, if you pay dividends to a shareholder, you just send them a payment and let them worry about the taxes.

But in some cases, it can be more complicated because you have to withhold taxes from their pay. If you're required to withhold taxes and you don't, you may end up being personally liable.

Whether you're an independent contractor, a business owner who works with freelancers, or another type of payer who issues 1099 forms, it's critical to understand backup withholding requirements. To get help now, use TaxCure to find a licensed tax professional who has experience with business tax problems.

What is backup withholding?

Backup withholding is when a payer withholds tax in a situation that they normally don't. For example, backup holding may apply when:

• Banks pays interest to accountholders.
• Business owners pay freelancers or contractors.
• Clients pay attorneys.
• Companies or other entities pay part of a settlement to an attorney.
• Corporations pay dividends to a shareholder.
• Payment processing companies or third-party networks pay an accountholder.
• Brokers make payments to clients.
• Companies send royalties to an artist.
• Casinos pay winners.
• The government pays someone.

Often, in these situations, the payer simply issues a payment and doesn't withhold any tax. But if the backup withholding rules are triggered, the payer must withhold taxes and send them to the IRS. 

When does backup holding apply?

Payers must withhold 24% of payments for backup withholding in the following situations:

• They don't get the payee's tax ID number in writing.
• The payee refuses to fill out a W-9 form.
• The payee doesn't say that they're not subject to backup withholding – this typically happens on Form W-9, but can be on other forms for dividend payments, in particular.
• The IRS notifies you that the payee is subject to backup withholding.

In short, you must withhold taxes if you don't have an accurate tax ID number for the payee, the payee has indicated that they're subject to backup withholding, or the IRS has alerted you. 

For example, imagine that you hire a freelancer to do some work for your business, you ask them for a W-9, but they never provide them. Say you pay them $10,000 – then, you must withhold 24% ($2400), send that amount to the IRS, and pay them the remaining $7600. At the end of the year, issue a 1099 that shows both the payments and the withheld tax. 

Payments exempt from backup withholding

According to the IRS, if you deal with any of the following payments, you do not have to worry about backup withholding. 

• Real estate transactions
• Foreclosures and abandonments
• Cancelled debts
• Distributions from Archer MSAs
• Long term care benefits
• Distributions from any retirement account
• Distributions from an employee stock ownership plan
• Fish purchases for cash
• Unemployment compensation
• State or local income tax refunds 
• Qualified tuition program earnings

However, other tax obligations may apply – for instance, if you're a foreign national who sells real estate in the United States, you may need to withhold taxes under the Foreign Investment in Real Property Tax Act (FIRPTA). The rules are complex – that's why it can be critical to work with a tax professional.

IRS notices about backup withholding

If the IRS wants you to withhold taxes from a payee's payments, they'll send you a notice. There are two types of backup withholding notices – BWH-B and BWH-C. 

BWH-B – Incorrect tax ID numbers

For withholding due to an incorrect taxpayer ID number, the IRS will send you notice CP2100 or CP2100A – these notices are the same, but CP2100 is for payers with over 50 or more information returns with errors, while CP2100A is for payers with fewer than 50 erronerous returns.

Once the IRS sends this notice, do the following:

• If the TIN is obviously incorrect, start backup withholding immediately – note that you must ask for the correct TIN at least three times to avoid penalties.
• If the TIN doesn't match the IRS records, double check your records – fix errors if possible, or otherwise, start the backup withholding.

BWH-C – Withholding due to unpaid taxes

If the payer hasn't been paying taxes due to interest or dividend payments, the IRS will notify them at least four times. Then, the IRS will send payers a letter telling them to withhold taxes. You must immediately start withholding 24% until you get another IRS notice.

How to pay backup withholding

You should make backup withholding payments to the IRS through the EFTPS system. If you already have a payroll tax account, you can make the payments through there. If not, you'll need to set up a new account. 

What about state-level backup withholding?

Check the laws in your state to see if you also need to withhold state income tax from the payee's payments. If so, you'll need to remit those payments directly to the state and track them separately from the IRS payments. 

How long does backup withholding last?

Backup withholding lasts until the payee solves the problem or the IRS notifies you to stop the withholding. For example, say that you hire a freelancer, they refuse to give you a W-9, so you withhold taxes from their first payment. A few days later, they give you a correct W-9 – now, you don't have to withhold taxes from their payments. 

However, if the IRS alerted you about the issue, you must wait to hear from them. Say, for example, that the IRS tells you to withhold backup taxes from an accountholder's interest payments. The IRS also sends the accountholder instructions on how to file their returns and pay their taxes. Now, let's say the account holder tells you that they're back in compliance with the IRS – that's great, but you can't stop the backup withholding until you get a notice from the IRS. 

Can you refund backup withholding?

No, once the tax has been paid, you cannot refund it to the payee. However, the payee can file a tax return at the end of the year, and if they overpaid, they'll get a refund from the IRS and/or the state if applicable.

What should I do if a payer insists on backup withholding?

You're expecting a full payment, but the payer insists on backup withholding. How can you preserve your payment and avoid these taxes? That depends on the situation, but keep these tips in mind:

• Know the rules – for example, casinos must withhold taxes from certain gambling winnings if you don't provide a tax ID number.
• Provide a correct tax ID number – if the payer requests a tax ID number, make sure to provide a correct number that matches your name.
• Address any IRS notices – before requiring backup withholding on interest or dividends, the IRS will send you several notices. Make the requested tax payments or file unfiled returns.
• Ask the payer why they're withholding taxes – if you're unsure, ask the payer why they are withholding taxes and attempt to address the issue directly. 
• Contact a tax professional – a licensed tax professional can help you deal with backup withholding, whether you're a payee or payer.

To get your questions answered now, use TaxCure to find a licensed tax professional. 

How to get credit for backup withholding

If you've been subject to backup withholding, those funds are not lost. To get them back, you must file a return – even if you're a few years behind on reporting 1099 income, it's still possible to get caught up. But act quickly, because you only have three years to collect refunds.

When you file your return, you'll report all of your income, but you'll also report any tax you paid in. That includes tax withheld from wages as well as backup withholding on 1099 forms. Then, the IRS will calculate how much you owe based on your income, filing status, and number of dependents. Any early payments you made will reduce how much you owe, and credits will also reduce that number – and if there's anything left over, you'll get a refund for the difference. 

FAQs 

Have more questions about backup withholding? Then, here are some answers to some of the most commonly asked queries.

Am I subject to backup withholding?

Not if you have a valid tax ID number that you share with the payer and you have reported all interest and dividend income. You may be subject to backup withholding if you don't have a tax ID number or have a history of not reporting or paying certain types of taxes.

Am I exempt from backup withholding?

Most payees are exempt from backup withholding. If you haven't been notified by the IRS that backup withholding applies to you, you're typically exempt. 

What is the backup withholding rate?

As of 2025, the rate is 24%. Prior to 2018, it was 28%. The rate is flat and does not change. Whether you pay someone $1000 or $100,000, the rate is still 24%. 

What triggers IRS backup withholding?

Failure to provide a valid tax ID number, giving an incorrect tax ID number, or having a history of not reporting certain types of income (generally interest or dividends) can all trigger backup withholding. 

How do I stop backup withholding?

Find out why the payer is withholding tax from your pay, and then fix the issue. For instance, if they don't have a tax ID for you, give them your Social Security Number or Individual Taxpayer Identification Number. If the payer has been notified that you haven't reported dividend income, file or adjust your returns and make payments as needed. Contact the IRS or a tax professional if you're not sure why you're subject to backup withholding.

What form do I file to prevent backup withholding?

If the backup withholding is due to not providing a correct taxpayer ID number, you can file Form W-9 to fix the issue. Make sure that the name on the form and the tax ID you provide match what's in the IRS's system for you. Also, make sure to certify that you're not subject to backup withholding by signing that section of the form.

Get help with tax problems now.

Dealing with tax problems is almost never easy – and unfortunately, it can be hard to find an experienced professional. That's where TaxCure comes in. This site is designed to help you find and assess tax professionals. 

Start your search by selecting the agency you need help with – that's the IRS if you're dealing with federal withholding and the state if you're facing state tax problems. Often, people need help with both agencies. Then, use the filters to narrow down the results even further. 

Finally, review your options by reading about each pro's experience and checking their reviews. Then, contact as many pros as you want for a consultation so that you can find the right fit. This process will help you get the help you need so that you can move forward and solve your tax problems once and for all.