Backup Withholding: When a Missing W-9 Costs 24 Percent
When a business must withhold from vendor payments, the IRS notices that start the clock, and how to report and deposit what is withheld.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Backup withholding requires a business to withhold 24 percent of reportable payments — such as payments to contractors — when the payee has not provided a taxpayer identification number, or when the IRS notifies the business that the number is wrong. It is deposited with the IRS and reported on Form 945; failing to withhold makes the business liable.
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When must you start withholding?
| Trigger | What to do |
|---|---|
| Payee does not provide a TIN on Form W-9 | Withhold 24% immediately on reportable payments until a TIN is provided |
| TIN obviously incorrect (wrong number of digits) | Treat as missing; withhold |
| First IRS "B notice" (CP2100 or CP2100A) that the name and TIN do not match | Send the payee the First B notice with a Form W-9 within 15 business days of the notice date or the date you received it, whichever is later; if no signed W-9 comes back, start withholding no later than 30 business days after that date |
| Second CP2100 or CP2100A for the same payee within three calendar years | Send the Second B notice (no W-9) within 15 business days; the payee must get validation from the Social Security Administration (a Social Security card) or the IRS (Letter 147C for an EIN); withhold if it has not arrived within 30 business days, and until it does |
| IRS "C notice" for underreported interest or dividends | Withhold as instructed |
Which payments are covered?
Payments reportable on Forms 1099-NEC and 1099-MISC, interest, dividends, and certain broker and payment card transactions. For payments reported on Forms 1099-NEC and 1099-MISC, backup withholding applies once the year's payments to that payee reach the reporting threshold — $2,000 for payments made after December 31, 2025 — or if the payer had to file a Form 1099 for, or backup withheld from, that payee the year before.
How do you deposit and report it?
Backup withholding is deposited under the same monthly and semiweekly deposit rules as payroll taxes, but separately from Form 941 deposits and with its own lookback test, and it is reported on Form 945, the annual return for nonpayroll withholding. The amount withheld appears on the payee's Form 1099, and the payee claims it as a credit on their own return.
How do you prevent it?
- Collect Form W-9 before the first payment, and keep it on file.
- Use the IRS TIN matching program, available through e-Services, to validate names and numbers before filing 1099s.
- Respond to B notices on time and keep copies of your requests.
What if you should have withheld and did not?
The business becomes liable for the tax that should have been withheld, plus penalties. Liability can be reduced if the payee shows they reported the income and paid the tax, but the documentation burden falls on the payer.
Frequently asked questions
Does backup withholding apply to employees?
No. Employee wages follow regular income tax withholding from Form W-4.
Can the payee get the money back?
Yes. They claim it on their income tax return as tax withheld.
Does it apply to foreign contractors?
Generally no. A foreign individual who gives you a valid Form W-8BEN (Form W-8BEN-E for an entity) is exempt from backup withholding; U.S.-source payments to foreign persons fall under the nonresident withholding rules instead.
Do corporations have to provide a W-9?
Yes, to establish their exempt status. Payments to corporations are usually exempt from 1099 reporting, but you still need the W-9.
Official sources
The IRS explains: “There are situations when the payer is required to withhold at the current rate of 24 percent. This 24 percent tax is taken from any future payments to ensure the IRS receives the tax due on this income.” — Internal Revenue Service, Backup withholding, https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding
The IRS explains: “You have 15 business days from the date of the CP2100A or CP2100 Notice, or the date you received it (whichever is later), to send a “B” Notice to a payee.” — Internal Revenue Service, Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), https://www.irs.gov/pub/irs-pdf/p1281.pdf
Next step
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