What it is
Under IRC 3406, a payer making a reportable payment must withhold 24% and send it to the IRS when the payee hasn't given a TIN, or has given one the IRS says is wrong, or in a few other cases. The withheld amount is credited to the payee on their income tax return, so for an honest payee it's a cash-flow problem, not a cost. For the payer it's a liability: if you should have withheld and didn't, IRC 3406(a) makes you liable for the amount as if it were your own tax, plus penalties and interest, whether or not you can collect it from the payee.
The rate has been 24% since 2018 and remains 24% for 2026.
The triggers
| Trigger | When withholding starts | Source |
|---|---|---|
| Payee has not furnished a TIN | Immediately, on the first reportable payment, until a TIN is furnished. A payee who is awaiting a TIN can certify that on the W-9 and get up to 60 days' grace on certain payments. | IRC 3406(a)(1)(A) |
| IRS notifies you the TIN is incorrect (CP2100/CP2100A) | No later than 30 business days after the notice date if the payee hasn't returned a valid W-9 (first notice) or agency validation (second notice) in response to your B-Notice. | IRC 3406(a)(1)(B); Pub 1281 |
| IRS notifies you the payee under-reported interest or dividends ("C-Notice") | Per the notice, on interest and dividend payments only. | IRC 3406(a)(1)(C) |
| Payee fails to certify (on the W-9) that they are not subject to backup withholding for under-reporting | On interest and dividend accounts where the certification is required. | IRC 3406(a)(1)(D) |
| Payee gives an obviously invalid TIN (wrong number of digits, alpha characters) | Treat as no TIN furnished: immediately. | Reg. 31.3406(h)-1 |
For an accounts-payable team, the first two rows are the whole job: withhold on vendors with no TIN, and withhold on vendors the IRS has flagged who didn't fix it in 30 business days. The deadline calculator gives the exact date for the second case.
Which payments are subject
Backup withholding applies to "reportable payments," which are the amounts reported on the 1099 series: nonemployee compensation, rents, royalties, interest, dividends, broker proceeds, patronage dividends, payment-card and third-party network transactions, and certain others. It does not apply to wages (which have their own withholding), to payments to corporations that are exempt from 1099 reporting, to most payments to foreign persons documented on a W-8 (chapter 3 withholding applies instead), or to payments below the reporting threshold for that form type.
Withholding applies to the gross reportable amount, not to the invoice net of expenses, and to every payment after the trigger date, not just the ones over the threshold.
Deposits, Form 945 and the 1099
- Deposits. Backup withholding is deposited through EFTPS on the same schedule rules as employment taxes (monthly or semiweekly, based on a lookback period), but it's tracked separately from your Form 941 liability. Total backup withholding under $2,500 for the year can be paid with the annual return.
- Form 945. The annual return for nonpayroll withholding, including backup withholding, due January 31 for the prior calendar year. Report total withheld and total deposited; it must reconcile to your deposits.
- The 1099. Show the amount withheld from each payee in the federal income tax withheld box (box 4 on 1099-NEC and 1099-MISC). That's how the payee gets credit. A 1099 with an amount in box 4 must be filed even if the payment was under the normal reporting threshold.
- Statements to the payee. The payee's copy of the 1099 is their evidence for the credit; you're not required to issue a separate receipt, but a note on the remittance advice explaining the short payment prevents most of the calls.
When it stops
Withholding stops when the trigger is cured: the payee furnishes a TIN (for a missing TIN), returns a valid W-9 (after a First B-Notice), or provides an SSA card copy or IRS Letter 147C (after a Second B-Notice). Stop on the next payment after you receive the document; you don't have to wait for anything from the IRS. You cannot refund amounts already withheld and deposited; the payee recovers them by claiming the credit on their return. Amounts withheld but not yet deposited can be returned to the payee if the document arrives before the deposit is due, and then are not reported.
For a C-Notice (under-reporting), only the IRS can tell you to stop.
Mistakes that create liability
- Not starting. The most common. A B-Notice goes out, nothing comes back, nobody changes the vendor record, and payments continue at 100%. Every one of those payments carries a 24% liability for the payer.
- Starting on the wrong date. Withholding "no later than 30 business days after the notice date" (Pub 1281). Counting calendar days or counting from the B-Notice mailing date can leave payments unwithheld.
- Withholding but not depositing on schedule. Same failure-to-deposit penalties as payroll.
- Not filing Form 945. Withholding shown on 1099s with no 945 to match generates an IRS notice.
- Refunding from your own funds after deposit. The payer can't reverse a deposit for the payee's benefit; the payee claims the credit.
- Withholding on a corrected account. If the payee fixed it before your deadline and the record wasn't updated, you've withheld tax that wasn't due and the payee has to wait for a refund.
Questions people ask
Is backup withholding a penalty on the vendor?
No. It's a prepayment of the vendor's own income tax, credited on their return. The only party penalized in the backup withholding regime is a payer who fails to withhold.
Do I withhold on a corporation?
Only if the payment is reportable. Most payments to C and S corporations are exempt from 1099-NEC/MISC reporting and so from backup withholding; attorney fees and medical payments to corporations are reportable and are subject to it.
The vendor says they'll send the W-9 next week. Can I wait?
For a missing TIN, no: withholding applies until the TIN is furnished. For a CP2100 account, you have until the 30-business-day deadline. After that, withhold and stop when the form arrives.
We withheld and the vendor is furious. What do we tell them?
That the IRS required it because the name/TIN pair they gave doesn't match IRS records, that the amount is credited on their tax return via box 4 of the 1099, and that it stops the moment they return a corrected W-9. Most anger comes from the surprise, which the B-Notice was supposed to prevent.