If you pay contractors and have ever received a B notice from the IRS, there is a good chance backup withholding was involved. For most small businesses, backup withholding is one of the least understood IRS compliance requirements, even though it has direct financial consequences.
Key Takeaway: Backup withholding requires a payer to withhold 24 percent of a contractor’s payment and send it directly to the IRS when the contractor fails to provide a valid Taxpayer Identification Number or when the IRS notifies the payer to begin withholding. Missing this step can leave your business liable for the amount that should have been withheld.
This guide explains what backup withholding is, what triggers it, and how to handle it correctly so you can stay compliant when filing 1099 forms.
What Is Backup Withholding?
Backup withholding is a tax collection mechanism the IRS uses when it cannot verify a payee’s tax information. Normally, payments to independent contractors are not subject to automatic withholding. The contractor receives the full payment and is responsible for paying taxes on their own.
Backup withholding changes that. When it applies, you are required to withhold 24 percent of the payment before sending it to the contractor. That withheld amount goes directly to the IRS.
The IRS uses this process to ensure taxes are collected even when a contractor has not provided complete or accurate information.
What Triggers Backup Withholding?
Backup withholding can apply in several situations. The most common are:
The contractor does not provide a TIN
When a contractor fails to provide a Taxpayer Identification Number on Form W-9, backup withholding is generally required. A TIN can be a Social Security number, Employer Identification Number, or Individual Taxpayer Identification Number.
You should request a completed W-9 from every contractor before issuing any payment. If the contractor refuses or delays, begin backup withholding immediately on any reportable payments.
The TIN does not match IRS records
If you submit a 1099 and the IRS cannot match the name and TIN you provided, it may send a B notice. A B notice is a formal IRS notification instructing you to begin backup withholding on future payments to that contractor until the discrepancy is resolved.
The first B notice gives the contractor 30 days to correct their information. If a second B notice arrives within three years, additional verification steps are required.
For a deeper look at how the IRS checks name and TIN combinations on 1099 forms, see this guide on how the IRS matches names and TINs on 1099 forms.
The contractor is flagged by the IRS for underreporting
In some cases, the IRS notifies payers directly to begin withholding for a specific payee because that payee has underreported income or dividend earnings in the past. This is a separate IRS program but follows the same 24 percent withholding rate.
What Payments Are Subject to Backup Withholding?
Most types of income reported on Form 1099 can be subject to backup withholding. Common examples include:
- Payments for services reported on Form 1099-NEC
- Rent and royalty payments reported on Form 1099-MISC
- Interest income reported on Form 1099-INT
- Dividends reported on Form 1099-DIV
- Payment card and third-party network transactions on Form 1099-K
If backup withholding applies, it covers the full reportable payment amount at the 24 percent rate.
How to Handle Backup Withholding as a Payer
If you are required to apply backup withholding, here is what you need to do:
Step 1: Begin withholding immediately
Once a triggering event occurs, do not wait. Start withholding 24 percent from each reportable payment to that contractor right away.
Step 2: Deposit withheld amounts to the IRS
Withheld backup withholding amounts are deposited with the IRS using the same schedule as payroll taxes. This is done through the Electronic Federal Tax Payment System (EFTPS).
Step 3: Report the withholding on the 1099
When you file the 1099 for that contractor, report the withheld amount in Box 4 (Federal income tax withheld) of the form.
Step 4: Keep documentation
Maintain records of the B notice or other trigger event, the W-9 request sent to the contractor, any responses received, and all payment records showing the amounts withheld.
What Happens If You Fail to Apply Backup Withholding?
If you were required to apply backup withholding but did not, your business could be held responsible for paying the unwithheld amount to the IRS. That liability falls on you, not the contractor.
In addition to paying the unpaid withholding, you may also face penalties for failing to deposit taxes on time or filing an incorrect 1099.
This is why collecting a completed W-9 from every contractor before the first payment is one of the most important compliance steps a small business can take. It is far easier to verify information upfront than to manage a backup withholding requirement after payments have already been made.
How to Avoid Backup Withholding Situations
Most backup withholding situations are preventable with a few consistent habits:
- Require every contractor to complete and sign a Form W-9 before receiving their first payment
- Verify the TIN and name combination using IRS TIN Matching before filing your 1099s
- Respond to any B notice promptly and follow the IRS instructions exactly
- Update contractor records whenever a contractor reports a name change, business restructure, or new EIN
When you take these steps consistently, the risk of triggering backup withholding drops significantly.
The IRS provides detailed guidance on backup withholding requirements at IRS.gov.
Frequently Asked Questions
What is the backup withholding rate for 2025 and 2026?
The backup withholding rate is 24 percent. This rate applies to all reportable payments when backup withholding is required. The withheld amount is sent to the IRS and may be credited against the contractor’s tax liability when they file their own return.
What do I do if a contractor will not give me their TIN?
If a contractor refuses to provide a TIN, you are still required to apply backup withholding on all reportable payments. Document your requests in writing and keep copies. The contractor may receive credit for the withheld taxes when they file, but your compliance obligation remains regardless of whether they cooperate.
Does backup withholding apply to payments made to corporations?
Generally, backup withholding does not apply to payments made to corporations. However, there are exceptions for payments to corporations for certain types of services, such as legal and medical services. For most routine contractor payments, payments to C-corporations and S-corporations are exempt from backup withholding.
Disclaimer: This content is for informational purposes only and is not tax or legal advice. Consult a qualified tax professional for guidance specific to your situation.
