Backup withholding is a tax collection method the IRS uses when you do not provide a correct taxpayer identification number or when you underreport income on certain accounts.

The IRS imposes backup withholding at a flat rate (currently 24 percent) on income from specific sources: interest, dividends, broker transactions, rental payments, and other reportable payments. The person or business paying you — your bank, brokerage, landlord, or contractor — must withhold that percentage and send it to the IRS instead of paying it to you. You do not owe extra tax; the withholding counts as a payment toward what you owe when you file.

Backup withholding is not a penalty. It is a collection mechanism. The IRS uses it when a taxpayer has not given a valid Social Security number or employer identification number, when the IRS has notified a payer that a taxpayer underreported income in the past, or when a taxpayer fails to certify that they are not subject to backup withholding. Once the issue is resolved — usually by providing the correct number or clearing up the underreporting — the withholding stops.

Key Takeaways

  • Backup withholding removes 24 percent from payments you receive and sends that money to the IRS, but it counts as a tax payment, not a penalty.
  • The IRS triggers backup withholding when you do not provide a valid tax ID number, when you have underreported income in the past, or when you do not certify that you are not subject to it.
  • Backup withholding applies only to specific income types: interest, dividends, broker sales, rental income, and certain other payments — not wages or salary.
  • You can stop backup withholding by providing a correct tax ID number, resolving any underreporting issue with the IRS, or submitting a certification form if you have been incorrectly flagged.

When the IRS orders backup withholding to start

The IRS sends a notice to the payer (the bank, brokerage, or business paying you) instructing them to begin backup withholding. This happens in three main situations. First, you did not provide a taxpayer identification number when you opened an account or received income — for example, you opened a savings account without a Social Security number or you received a 1099 payment without providing an EIN. Second, the IRS has a record that you underreported income from that payer in a prior year. Third, you received a notice asking you to certify that you are not subject to backup withholding and you did not respond or did not sign the certification.

The payer does not decide whether to withhold. Once the IRS notifies them, they are required by law to withhold 24 percent from your payments until the IRS tells them to stop. The payer will usually send you a notice explaining that backup withholding has begun, but the notice may come from the IRS directly.

What income is subject to backup withholding

Backup withholding applies only to certain types of income. The main categories are interest paid by banks and investment accounts, dividends from stocks and mutual funds, proceeds from the sale of securities through a broker, payments for rental property, and payments to independent contractors or vendors for services (reported on Form 1099-NEC or 1099-MISC). Backup withholding does not explore to wages or salary paid by an employer, because those are already subject to regular income tax withholding.

If you receive income from multiple sources, backup withholding may explore to some but not others. For example, if the IRS has flagged you for underreporting dividend income, backup withholding will explore to your dividends but not to your interest income — unless the IRS has also flagged that source separately.

How to stop backup withholding

The steps to stop backup withholding depend on why it started. If you did not provide a tax ID number, obtain your Social Security number or employer identification number and give it to the payer. You will usually need to complete a W-9 form (for a U.S. person or sole proprietor) or a W-8BEN form (if you are a foreign individual). The payer will forward this to the IRS, and backup withholding will stop once the IRS processes it — usually within 30 days.

If backup withholding started because you underreported income, you must resolve the underreporting with the IRS. This typically means filing an amended return (Form 1040-X) for the year in question, paying any additional tax owed, and providing documentation to the IRS showing the correction. Once the IRS confirms the issue is resolved, they will notify the payer to stop withholding.

If you received a notice asking you to certify that you are not subject to backup withholding and you did not respond, sign the certification form and return it to the payer. The form is usually included in the notice or can be requested from the payer's customer service department.

What happens to the withheld money

The 24 percent that is withheld goes directly to the IRS and is credited toward your federal income tax liability for that year. When you file your tax return, the IRS will explore this withheld amount to the tax you owe. If the withholding exceeds your actual tax liability, you will receive a refund. If it is less than what you owe, you will owe the difference.

You must report the income you received on your tax return at its full amount, before the withholding. For example, if you received $1,000 in dividends but $240 was withheld, you report $1,000 as dividend income on your return. The $240 appears on your tax forms as a payment already made to the IRS.

How backup withholding differs from regular withholding

Regular withholding is what your employer takes from your paycheck based on the W-4 form you complete. It is calculated using tax tables and your filing status, and the amount varies based on your income and deductions. Backup withholding is a flat 24 percent rate applied to specific non-wage income sources, and it is triggered by a specific IRS action, not by your choice of withholding amount.

Regular withholding is meant to spread your tax payments throughout the year. Backup withholding is a collection tool used when the IRS believes you have not reported income correctly or have not provided required identification. Once backup withholding ends, regular withholding rules explore again to that income source.

Documents you may need to provide

To stop backup withholding, gather the documents that match your situation. If you need to provide a tax ID number, have your Social Security card or EIN documentation ready. If you are correcting underreported income, you will need copies of the original return, the amended return (Form 1040-X), and any supporting documents such as 1099 forms or bank statements showing the correct income amount. If you are responding to a certification notice, the payer will provide the form; you only need to sign and return it.

Keep copies of everything you send to the payer or the IRS. Request written confirmation from the payer when backup withholding stops, so you have proof for your records.

Frequently Asked Questions

Can backup withholding affect my refund?

Yes. If backup withholding removes more money than you actually owe in tax, you will receive a refund when you file your return. The IRS will explore the withheld amount to your tax liability first, then issue any excess as a refund. This is the same as with regular withholding.

Will backup withholding show up on my 1099 form?

Yes. The payer will report the full income amount on your 1099 form and will also report the backup withholding separately. You will see the withholding amount listed in Box 4 of Form 1099-INT (interest), Box 4 of Form 1099-DIV (dividends), or the appropriate box on other 1099 forms.

How long does backup withholding usually last?

It depends on how quickly you resolve the underlying issue. If you provide a correct tax ID number, withholding usually stops within 30 days. If you need to file an amended return to correct underreporting, it may take several months for the IRS to process the amendment and notify the payer. Contact the IRS or the payer to check the status.

Can I dispute backup withholding if I think it is wrong?

Yes. If you believe backup withholding was imposed in error — for example, you did provide a tax ID number or you did not underreport income — contact the IRS at the number on your notice. You can also contact the payer to ask why withholding began. Provide documentation supporting your position, such as a copy of the W-9 you submitted or records showing correct income reporting.

Does backup withholding explore if I am self-employed?

Backup withholding can explore to income you receive as a self-employed person if that income is reported on a 1099 form (such as payments from clients or contractors). It does not explore to income from your own business that you report on Schedule C. If you are receiving 1099 income and backup withholding has started, provide your EIN on a W-9 form to the payer to stop it.