Backup Withholding: What It Is and How to Stop It (2025)

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H1

Backup Withholding: What It Is and How to Stop It

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ANSWER SECTION

Backup withholding is a 24% flat-rate federal income tax that banks, brokers, and other payers must withhold from certain payments to you. The IRS requires this withholding when you fail to provide a valid taxpayer identification number (TIN), provide an incorrect TIN, or have underreported interest or dividend income. The 24% is sent directly to the IRS and credited to your tax account.

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H2: What Triggers Backup Withholding?

Backup withholding applies in three main situations:

1. Missing or Incorrect TIN (B-Notice):

• You don't provide a TIN to the payer
• The IRS notifies the payer that your TIN doesn't match IRS records
• You fail to certify under penalties of perjury that your TIN is correct (Form W-9)

2. Underreporting Interest or Dividends:

• You underreported interest or dividend income by more than $400
• The IRS sent you four notices over 120 days
• You didn't respond or prove the income was reported correctly

3. Failure to Report or Pay:

• You didn't report all interest and dividends on your return
• You didn't pay tax on interest and dividend income

Payments Subject to Backup Withholding:

• Interest payments (Form 1099-INT)
• Dividends (Form 1099-DIV)
• Rents, royalties, non-employee compensation (Form 1099-MISC, 1099-NEC)
• Payment card transactions (Form 1099-K)
• Broker proceeds (Form 1099-B)
• Certain government payments (Form 1099-G)

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H2: How to Stop Backup Withholding

To stop backup withholding, you must fix the underlying issue:

For B-Notices (Missing/Incorrect TIN):

1. Verify your correct TIN (SSN or EIN)
2. Complete Form W-9 with your correct information
3. Submit to the payer who is withholding
4. The payer will stop withholding once they have correct information

For Underreporting:

1. File Form 4669 (Statement of Payments Received)
2. Provide proof that income was actually reported
3. Pay any additional tax due
4. Request a determination from the IRS

Timeline:

• B-Notice fix: Usually stops immediately when correct W-9 provided
• Underreporting: May take several weeks after IRS review

Important: The IRS cannot stop backup withholding by phone. You must provide correct information or resolve the underreporting issue.

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H2: The 24% Rate Explained

The backup withholding rate has changed over time:

• 2023-2025: 24%
• 2017-2022: 24%
• Before 2017: 28%

The rate is fixed by law and does not vary based on:

• Your income level
• Your tax bracket
• The amount of the payment

Why 24%? This rate approximates the tax rate many taxpayers would owe on this type of income. It ensures the IRS receives payment even if the taxpayer doesn't file a return.

Getting the Money Back: If too much was withheld, you'll receive a refund when you file your tax return. The withheld amount appears as federal income tax paid on your return.

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H2: How Backup Withholding Affects Your Tax Return

When you're subject to backup withholding:

Forms You'll Receive:

• Form 1099 showing gross payment
• Separate box showing federal income tax withheld

On Your Tax Return:

• Report the full gross amount as income
• Claim the withheld amount as tax payments
• Net result: Tax refund if too much was withheld

Example:

• $10,000 in dividend income
• Backup withholding: $2,400 (24%)
• You receive: $7,600
• On Form 1040: Report $10,000 dividends, claim $2,400 withholding
• If your tax rate is 15%: You overpaid by $900 ($2,400 - $1,500)

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H2: Related Tax Questions

For a simpler explanation of when backup withholding applies, see our guide on what is backup withholding covering the basics of the 24% withholding rule.

Learn the simple definition and common scenarios in our guide on backup withholding meaning — a quick reference guide to when this withholding applies.

Understand when interest income triggers backup withholding requirements in our guide on taxable interest covering Form 1099-INT reporting.

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