What it is
Under IRC 3406IRC 3406Internal Revenue Code, Cornell LII, 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)IRC 3406Internal Revenue Code, Cornell LII 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)IRC 3406Internal Revenue Code, Cornell LII |
| 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)IRC 3406Internal Revenue Code, Cornell LII; 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)IRC 3406Internal Revenue Code, Cornell LII |
| 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)IRC 3406Internal Revenue Code, Cornell LII |
| Payee gives an obviously invalid TIN (wrong number of digits, alpha characters) | Treat as no TIN furnished: immediately. | Reg. 31.3406(h)-1Treas. Reg. 31.3406(h)-1Treasury regulations, Cornell LII |
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.
Count business days from the notice date, not from the day you mailed the B-Notice.
For a C-Notice (under-reporting), only the IRS can tell you to stop.
The state layer
Federal backup withholding does not trigger any state withholding by itself, but eight states have a counterpart. California, Maine and Vermont withhold their own tax whenever federal backup withholding applies to a payment (7 percent, 5 percent and a Commissioner-prescribed amount); Colorado, Georgia, Minnesota, North Carolina and South Carolina have their own trigger, a missing or incorrect TIN or an ITIN on a payment for services, at rates from 4 percent to 9.85 percent, and three of them withhold on an ITIN even when it matches. Twenty states separately withhold on non-wage payments to nonresident contractors, entertainers and royalty owners. The state backup withholding and nonresident withholding tables cover all 50 states and DC.
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.
The IRS unit that enforces this
Since 2022 a dedicated IRS unit selects payers directly from filed 1099s: no payee TIN and no Form 945, or box 4 withholding and no Form 945. The manual that governs it, IRM 4.19.26IRM 4.19.26Internal Revenue Manual, irs.gov, makes three things explicit:
- A missing TIN triggers withholding at the time of payment regardless of any threshold, and a continuing business relationship is not a factor. The liability is simply the payments times 24%.
- The only defense is proof the TIN was on file when the payment was made, in a signed written statement with the TINs. Corrected 1099s, and explanations about software or staff changes, are rejected.
- Box 4 withholding reported on a 1099 is treated as withheld once the form is furnished; the only way out is a corrected form and a refund to the payee before year-end. Form 4669 abates the tax only, never the penalties or interest.
Full detail, with subsection citations: the Form 945 non-filer program.
The underreporting side of backup withholding starts inside the individual underreporter program, before any payer hears of it. The manual says CP 2000 PARAGRAPH 85 "automatically generates to inform the taxpayer they may be subject to Backup Withholding (BWH) when the total of U/R interest, dividends, and patronage dividends is greater than $500" (IRM 4.19.3.8.3.6(3), 4.19.3.8.4.3(8), 4.19.3.8.14.2(3))IRM 4.19.3.8.3.6(3)Internal Revenue Manual, revised Oct. 10, 2025, irs.govIRM 4.19.3.8.4.3(8)Internal Revenue Manual, revised Oct. 10, 2025, irs.govIRM 4.19.3.8.14.2(3)Internal Revenue Manual, revised Oct. 10, 2025, irs.gov. The paragraph tells the payee: "If you agree our proposal is correct but you don't pay the tax increase, we may notify payers to deduct and withhold 24 percent of any payments they make to you in the future. This is called backup withholding" (Exhibit 4.19.3-7). On the credit side, the same manual accepts backup withholding passed through on a Schedule K-1 as support for a payee's withholding claim only when it appears at Form 1041 Schedule K-1 box 13 code B, Form 1065 Schedule K-1 box 15 code O or Form 1120-S Schedule K-1 box 13 code O (IRM 4.19.3.23.5.24(1); 4.19.3.18.1.1(2))IRM 4.19.3.23.5.24(1)Internal Revenue Manual, irs.govIRM 4.19.3.18.1.1(2)Internal Revenue Manual, irs.gov, and reminds examiners that "Schedules K-1 should not include W/H. Only backup withholding (BWH) can be reported on a Schedule K-1" (IRM 4.19.3.8.12.1(6))IRM 4.19.3.8.12.1(6)Internal Revenue Manual, irs.gov. A pass-through entity that withheld on a partner or beneficiary should code the K-1 exactly that way, or the credit will be questioned. See why a correct 1099 still triggers a CP2000.
The payee's credit depends on the 1099 you file
The 24% you withhold is the payee's money, held for them as a prepayment of their own tax, and they recover it as a credit on their return. The Accounts Management manual that processes that credit checks it against the information return the payer filed. The decision table for withholding credits turns on whether the amount claimed "can be verified on CC IRPTR," the IRS's file of filed 1099s and W-2s; withholding that cannot be verified there is disallowed or not considered above redacted tolerances, while "Form 1099-R or Schedule K-1 shows the credit as back-up withholding" earns "Allow taxpayer's figures" (IRM 21.6.3.4.2.2)IRM 21.6.3.4.2.2Internal Revenue Manual, revised July 8, 2025, irs.gov. The substantiation the payee can send is a W-2, W-2G, 1099-R, Form 4852 substitute, Schedule K-1 "or similar documentation," and the IRS may route the question to its verification unit for up to 30 days.
The payer-side consequence is simple. A business that withholds 24% and then files the 1099 with box 4 blank, or files it late, or does not file it, has left the payee with money the IRS cannot see. The payee's credit is questioned, the payee calls you for a statement, and the business's Form 945 shows a deposit with no matching 1099 detail. Report every dollar withheld in box 4 of the 1099 under the payee's TIN, and file it on time; the Form 945 line 2 total should equal the sum of those box 4 figures. One more rule for trusts and estates: withholding reported under a trust's EIN on Form 1041 "CANNOT be transferred" to a beneficiary's individual return, and "Backup withholding distributed to the beneficiary is reported on Schedule K-1" (IRM 21.6.3.4.2.2)IRM 21.6.3.4.2.2Internal Revenue Manual, irs.gov, so a trust that was backup withheld on passes the credit through the K-1, not by asking the payer to reissue the 1099.
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.