What Is Backup Withholding? (IRS Rules Explained)

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H1

What Is Backup Withholding?

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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 when specific conditions are met. The IRS requires this withholding when you fail to provide a valid taxpayer identification number (TIN), provide an incorrect TIN, or have previously underreported interest or dividend income. The payer sends the withheld 24% directly to the IRS, and you claim credit for it when you file your tax return.

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H2: When Does Backup Withholding Apply?

Backup withholding applies in these situations:

B-Notice Situations (Most Common):

• You fail to provide a TIN (Social Security Number or EIN) to the payer
• The IRS notifies the payer that your provided TIN is incorrect
• You fail to certify your TIN under penalties of perjury (Form W-9)

Underreporting Situations:

• The IRS determines you underreported interest or dividend income by more than $400
• The IRS sends you four notices over 120 days
• You fail to respond or establish that backup withholding doesn't apply

Types of Payments Subject to Backup Withholding:

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

Not Subject to Backup Withholding:

• Wages and salary (regular withholding applies instead)
• Pension distributions
• IRA distributions
• Real estate transactions

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H2: How to Stop Backup Withholding

If you're subject to backup withholding, take these steps to stop it:

Step 1: Provide Correct TIN

• Complete Form W-9 with your correct name and TIN
• Submit to the payer who is withholding

Step 2: If You Received a B-Notice

• Compare the TIN on the B-Notice with your actual SSN/EIN
• If incorrect, provide correct information
• If correct, contact the IRS at 1-800-829-0922

Step 3: If Underreporting Caused It

• File Form 4669 to establish the amount actually received
• Pay any tax due
• Request a determination letter from the IRS

Timeline to Stop:

• If you provide correct information: Backup withholding stops immediately
• If IRS verification required: May take several weeks

Important: The IRS cannot stop backup withholding until the underlying issue is resolved. Simply calling without providing correct information won't help.

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H2: How Backup Withholding Works on Your Tax Return

The 24% withheld is treated like regular tax withholding:

Forms you'll receive:

• Form 1099 showing gross payment AND amount withheld
• The withheld amount appears in a separate box (varies by form type)

On your tax return:

• Report the full gross amount as income
• Include the withheld amount as federal income tax withheld
• The withholding reduces your tax due or increases your refund

Example:

• You receive $1,000 in interest
• Backup withholding: $240 (24%)
• You receive: $760
• On Form 1040: Report $1,000 interest income, claim $240 withholding

You get the money back if:

• Your tax liability is less than the amount withheld
• You file a tax return claiming the withholding

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H2: State Tax Treatment

Backup withholding is a federal requirement. State treatment varies:

California:

• California does not have backup withholding
• However, California requires withholding on certain payments to non-residents
• If federal backup withholding applies, California may also require state withholding on the same payment

States with Similar Programs:

• Some states require withholding on 1099 payments to non-residents
• Requirements vary significantly by state

Most states: Follow the payee's certification rules similar to federal W-9

For California residents, the main concern is federal backup withholding. State withholding, if required, is separate and typically at a different rate.

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H2: Related Tax Questions

For a comprehensive guide to backup withholding including how to dispute underreporting determinations, see our complete guide on backup withholding with Form 4669 instructions.

Learn the simpler definition and common scenarios in our guide on backup withholding meaning — a shorter explanation of when the 24% rate applies.

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

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