Backup withholding is a 24% federal tax that a business must hold back from certain payments, like contractor pay, interest or dividends, when the person being paid hasn't given a correct taxpayer ID number or the IRS says they underreported income. The business sends that money to the IRS, and the payee claims it as tax paid on their return.
Most freelancers and small business owners never think about backup withholding until a payment shows up 24% lighter than expected. Or, on the other side, until the IRS sends a notice saying you should have been withholding and weren't.
It's not complicated once you know the triggers. This guide covers what backup withholding is, the 2026 rate and threshold, when it applies, how to stop it and what records to keep.
The short version
Rate: 24% of the payment.
Main trigger: a missing or incorrect taxpayer identification number (TIN).
New for 2026: for contractor and miscellaneous payments, the threshold rose from $600 to $2,000.
The fix: usually a correct, signed Form W-9.
Not lost money: payees claim the withheld amount on their tax return.
What Is Backup Withholding?
Backup withholding is the IRS's safety net for payments that aren't covered by regular paycheck withholding.
When a business pays an employee, taxes come out of every paycheck. When it pays a freelancer, a landlord or an investor, usually nothing is withheld. The IRS relies on the payee to report that income. Backup withholding kicks in when the IRS can't match the income to the right person, or has reason to think it won't be reported.
Tax held back at the source because the normal reporting trail is broken.
That's the backup withholding meaning in short.
What Is the Backup Withholding Rate in 2026?
The backup withholding rate in 2026 is 24%. It's been 24% since 2018, and the One Big Beautiful Bill Act didn't change it.
What did change is when it starts for many businesses.
What's new for backup withholding in 2026
Starting with payments made on or after January 1, 2026, the reporting threshold for Forms 1099-NEC and 1099-MISC rose from $600 to $2,000.
From 2027, the threshold adjusts for inflation each year.
Other payment types, like interest and dividends, keep their own rules.
A quick way to picture the rate: on a $2,500 contractor payment subject to backup withholding, the business sends $600 to the IRS and pays the contractor $1,900.
Payment$2,500→To the IRS (24%)$600+To the contractor$1,900
When Does Backup Withholding Apply?
Backup withholding applies in four main situations. Per the IRS, a payer must withhold when:
The payee doesn't provide a TIN, such as a Social Security number or EIN.
The IRS says the TIN is wrong. The name and number on file don't match IRS records.
The IRS says the payee underreported interest or dividend income.
The payee doesn't certify they're exempt from backup withholding, when that certification is required (mostly for interest and dividend accounts).
In practice, the first two cause almost every case. Both come down to the paperwork a payee hands the payer.
What Payments Are Subject to Backup Withholding?
Backup withholding covers income reported on information returns, mostly the 1099 series.
Usually subject to backup withholding
Not subject to backup withholding
Contractor and freelance pay (1099-NEC)
Employee wages (W-2)
Rents, royalties and other income (1099-MISC)
Most retirement plan and IRA distributions
Interest (1099-INT)
Real estate sale proceeds (1099-S)
Dividends (1099-DIV)
Canceled debt (1099-C)
Broker and barter proceeds (1099-B)
Payment card and third-party network payments (1099-K)
Every 1099 a business files is matched against the payee's tax return. When the name and TIN don't line up, or there's no TIN at all, that income can slip through unreported.
Backup withholding closes that gap. By collecting 24% upfront, the IRS makes sure at least some tax is paid, even if the payee never reports the income. It also gives payees a strong reason to fix their records quickly.
Form W-9 is how a payee gives a business their name, TIN and tax classification. It's also where they certify whether they're subject to backup withholding.
Here's why it matters:
No W-9, no TIN: the payer generally has to start backup withholding once payments are reportable.
W-9 with a correct TIN: no backup withholding, unless the IRS later flags a problem.
W-9 with a wrong name or number: withholding may start after the IRS spots the mismatch.
For businesses, the easiest rule is simple: collect a signed W-9 before the first payment. For freelancers, send one the moment a new client asks.
What Is a CP2100 Notice?
A CP2100 or CP2100A notice is a letter the IRS sends to a payer, listing 1099s where the payee's name and TIN don't match IRS records. CP2100 goes to payers with larger batches of mismatches, and CP2100A goes to those with fewer.
Getting one sets a clock running:
What happens after a CP2100
The payer comparesthe IRS list with its own records to confirm the mismatch.
The payer sends a "B notice"to each affected payee, usually within 15 business days, with a blank W-9.
The payee has 30 business daysto return a corrected W-9.
No response?The payer must start backup withholding at 24%.
A second B notice within three yearsneeds stronger proof, such as a Social Security Administration record or an IRS Letter 147C for an EIN.
How to Stop Backup Withholding
How you stop backup withholding depends on why it started.
Missing TIN: give the payer a completed, signed W-9 with your correct TIN. Withholding should stop on future payments.
Name and TIN mismatch: send a corrected W-9. Make sure the name matches exactly what the IRS or Social Security Administration has on file.
Second mismatch notice: get official confirmation of your TIN from the Social Security Administration or the IRS, then send it with your W-9.
Underreported income: file any missing returns, pay what's owed, and ask the IRS to confirm the issue is resolved. The IRS then tells your payers to stop.
Amounts already withheld won't be refunded by the payer. You get them back through your tax return.
Who Is Responsible for Backup Withholding, the Payer or Payee?
Both have a role, but the legal duty sits with the payer.
Topic
Payer (the business making the payment)
Payee (the person being paid)
Main job
Collect W-9s, withhold 24% when required, send it to the IRS
Provide a correct TIN on a signed W-9
Reports it on
Form 945 and the payee's 1099
Their own tax return
If they get it wrong
Can owe the tax they should have withheld, plus penalties
Loses 24% of payments until it's fixed
If a business should have withheld and didn't, it can end up paying that 24% out of its own pocket.
What Is Form 945 Used For?
Form 945 is the annual return businesses use to report federal income tax withheld from nonpayroll payments, and backup withholding is the most common example.
Who files: any business that withheld backup withholding (or other nonpayroll federal income tax) during the year
When: by January 31 of the following year, or February 10 if all deposits were made on time
Deposits: withheld amounts are deposited during the year, just like payroll taxes, not saved up for the return
The withheld amount also appears in box 4 of the payee's Form 1099.
Is Backup Withholding Refundable?
Yes, in the sense that it's not an extra tax. Backup withholding is a prepayment of the payee's income tax.
The amount withheld shows up on your 1099. You report it on your return as federal income tax withheld. If your total withholding and payments are more than you owe, you get the difference back as a refund.
That's also why keeping your 1099s matters. Lose track of one showing backup withholding, and you could miss a credit you're owed.
How Businesses Should Keep Backup Withholding Records
Clean records protect you if the IRS ever asks why you did or didn't withhold.
Records to keep
Signed W-9s for every contractor and vendor you pay
CP2100 notices and copies of every B notice you sent
Payee responses, including corrected W-9s and dates received
Payment records showing gross amounts and amounts withheld
Deposit confirmations for backup withholding sent to the IRS
Form 945 and all related 1099s
Keep these for at least four years after the tax is due or paid, whichever is later. That's the period the IRS sets for employment tax records. Storing them digitally in one place makes it far easier to answer an IRS letter quickly.
How ManageReceipt Helps Keep Your Tax Records Organized
Backup withholding is all about paperwork being in the right place at the right time. ManageReceipt helps you keep the documents behind your business payments organized.
One home for tax documents. Store W-9s, 1099s and IRS letters in the doc wallet.
Receipts, captured. Snap payment receipts with the receipt scanner so every expense has proof.
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Frequently Asked Questions
What is backup withholding?
A 24% federal tax a payer must hold back from certain payments when the payee's TIN is missing or incorrect, or when the IRS says the payee underreported income.
What is the backup withholding rate in 2026?
24%. The rate didn't change for 2026, but the threshold for contractor and miscellaneous payments rose to $2,000.
When does backup withholding apply?
When a payee doesn't give a TIN, gives an incorrect one, underreports interest or dividends, or fails to certify exemption when required.
What payments are subject to backup withholding?
Mainly payments reported on 1099 forms, such as contractor pay, rents, royalties, interest, dividends, broker proceeds and payment card transactions. Employee wages aren't included.
Why would the IRS require backup withholding?
To make sure tax gets collected on income it can't match to a taxpayer, or that it believes wasn't fully reported.
How does a W-9 affect backup withholding?
A signed W-9 with a correct TIN generally prevents backup withholding. Without one, the payer must withhold once payments are reportable.
How do I stop backup withholding?
Give the payer a signed W-9 with your correct TIN. If the IRS flagged underreported income, resolve it with the IRS so it can tell your payers to stop.
What is a CP2100 notice?
An IRS notice sent to payers listing 1099s with name and TIN mismatches. It starts the process that can lead to backup withholding.
What is Form 945 used for?
Businesses use Form 945 to report backup withholding and other federal income tax withheld from nonpayroll payments each year.
Is backup withholding refundable?
It counts as tax already paid. Payees claim it on their return, and any amount beyond what they owe comes back as a refund.
Who is responsible for backup withholding, the payer or payee?
The payer is legally responsible for withholding and sending it to the IRS. The payee is responsible for giving a correct TIN.
How should businesses keep backup withholding records?
Keep W-9s, IRS notices, B notices, payment and deposit records, Form 945 and related 1099s for at least four years, ideally stored digitally in one place.
Stay Ahead of Backup Withholding
Backup withholding is almost always a paperwork problem, and that means it's almost always preventable.
Businesses should collect a signed W-9 before the first payment. Payees should make sure the name and number on it match IRS records.
Keep the paperwork organized and backup withholding stays where it belongs: a rule you know about but rarely deal with. Try ManageReceipt to keep your W-9s, 1099s and receipts in one place.
Keep W-9s, 1099s and receipts in one placeDownload Manage Receipt and have your records ready when the IRS asks.
This guide gives general information about US backup withholding rules. It isn't tax or legal advice, so check with a tax professional about your situation.
