The short answer
If the IRS has never sent you a letter saying you are subject to backup withholding, you are not subject to it. Leave the certification as printed on the W-9 (don't cross out item 2) and sign. That's the case for the overwhelming majority of people who see the question.
What backup withholding is
Backup withholding is a flat 24% that a payer (a bank paying you interest, a company paying you as a contractor, a brokerage, a payment platform) must take out of certain payments and send to the IRS in specific situations: you didn't give them a taxpayer identification number, the number you gave doesn't match IRS records, or the IRS told them to withhold because you under-reported interest or dividends on a past return. It isn't a penalty and it isn't extra tax; whatever is withheld shows up in box 4 of your 1099 and is credited against your income tax when you file, like withholding from a paycheck. It's a cash-flow problem, not a cost, but it's one you can avoid entirely with a correct W-9.
What the W-9 checkbox actually says
Part II of Form W-9, "Certification," has you sign under penalties of perjury that four things are true. Item 2 is the one that trips people up:
"I am not subject to backup withholding because (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding."
Read (b) again: it's about whether the IRS has notified you. If you've never received such a letter (it's a CP539 or similar), the statement is true for you and you leave it alone. Many online forms turn this into a checkbox or a yes/no question ("Are you subject to backup withholding?"); the answer that corresponds to the printed certification is No. You cross out item 2 only if the IRS has told you that you are currently subject to withholding for under-reporting.
The other items are that the TIN you entered is correct, that you're a U.S. citizen or other U.S. person, and (for accounts that matter for FATCA) that any exemption code is correct. A foreign person doesn't sign a W-9 at all; they use a Form W-8.
When the answer is yes
You are subject to backup withholding if any of these applies:
- The IRS sent you a notice (CP539) that you under-reported interest or dividend income and that payers of that income must withhold. The notice tells you how to resolve it. Until the IRS releases it, you must cross out item 2 on any W-9 you give to a payer of interest or dividends, and those payers withhold 24%.
- You haven't given the payer a TIN. Withholding applies to reportable payments until you do. The fix is the W-9.
- The IRS told the payer your name and TIN don't match. You'll get a "B-Notice" letter from the payer asking for a corrected W-9 (or, on a second notice, a copy of your Social Security card or an IRS Letter 147C). Respond within the 30 business days in the letter and withholding never starts, or stops. See Received a B-Notice?
How to stop it
For a missing or mismatched TIN, give the payer a correct signed W-9 (the name on line 1 must be the name the IRS has for the number; for a sole proprietor or single-member LLC using an SSN, that's your own name, with the business name on line 2). Withholding stops on the next payment. Amounts already withheld can't be refunded by the payer; you claim them on your tax return. For an IRS under-reporting notice, only the IRS can lift it: follow the instructions on the notice, file or amend the return in question, and the IRS will notify you and your payers when withholding ends.
Questions people ask
My bank's signup asks "Are you subject to backup withholding?" I've never heard of it. What do I answer?
No. The question is the W-9 certification in a different costume. Unless the IRS has sent you a letter saying otherwise, you are not subject to it.
Does answering yes get me in trouble?
No, but it makes the bank withhold 24% of your interest for no reason, and only the IRS can tell them to stop. If you answered yes by mistake, contact the payer and submit a corrected W-9 with the standard certification.
I'm exempt from backup withholding. What does that mean?
Certain payees, mostly corporations, tax-exempt organizations, government entities and financial institutions, are exempt, and they enter an exempt payee code on line 4 of the W-9. Individuals are almost never exempt; for an individual the correct position is "not subject," which is different from "exempt."
Money was withheld from a payment. How do I get it back?
It's reported in box 4 of the 1099 you receive from that payer, and you claim it as federal tax withheld on your return. If you're a sole proprietor it goes on Form 1040 with your other withholding.
I'm not a U.S. person. Do I fill out the W-9?
No. Use the appropriate Form W-8 (W-8BEN for individuals). Backup withholding doesn't apply to documented foreign persons; different withholding rules do.