Backup withholding is a tax collection tool the IRS uses when you don't provide a correct taxpayer identification number or when you underreport income

When backup withholding is in effect, the IRS requires the person or business paying you — your employer, a bank, a brokerage, or a client — to withhold 24% of that payment and send it to the IRS instead of giving it to you. This happens before you ever see the money. It is not a penalty, but it is a mandatory collection method the IRS uses to protect tax revenue when there is a mismatch between what you report and what payers report about you.

Backup withholding typically applies to income that is not wages: interest, dividends, freelance payments, gambling winnings, and certain other payments. If you receive a W-2 from an employer, backup withholding rules work differently and are less common. The 24% rate is set by federal law and does not change based on your tax bracket or filing status.

Key Takeaways

  • Backup withholding removes 24% from payments you receive and sends it to the IRS, and it stays in place until you fix the underlying problem.
  • The IRS initiates backup withholding when you give a wrong taxpayer identification number, fail to certify that you are not subject to backup withholding, or have a history of underreporting income.
  • You can stop backup withholding by providing a correct taxpayer identification number, signing a Form W-9 or equivalent, or resolving underreporting issues with the IRS.
  • Backup withholding does not reduce what you owe in taxes — it is a prepayment that gets credited when you file your return.
  • If backup withholding was taken in error, you can request a refund once you have corrected the underlying issue and filed your tax return.

When the IRS orders backup withholding to start

The IRS sends a notice to the payer — the bank, employer, or business paying you — instructing them to begin backup withholding. This notice includes your name and taxpayer identification number. The payer then withholds 24% from your next payment and every payment after that until the IRS tells them to stop.

Backup withholding most often starts because of one of three situations. First, you provided an incorrect or missing taxpayer identification number (usually a Social Security number or employer identification number) on a Form W-9 or similar document. Second, you did not certify that you are not subject to backup withholding when the payer asked you to do so. Third, the IRS has a record that you underreported income in the past — meaning you reported less income on your tax return than the payer reported sending to you on a Form 1099.

You will not receive a warning before backup withholding starts. The payer will simply begin withholding 24% from your payments. You may not realize it is happening until you notice the reduced payment or receive a notice from the IRS.

How backup withholding affects your income and taxes

When 24% is withheld, you receive only 76% of the payment. If you were expecting $1,000 in interest from a bank account, you will receive $760 and the bank will send $240 to the IRS. This can create cash flow problems, especially if you were counting on the full amount.

The 24% withheld is a prepayment of your tax liability, not a separate penalty. When you file your tax return for the year, the IRS credits the amount withheld against your total tax bill. If you owe more than what was withheld, you pay the difference. If the withheld amount exceeds what you owe, you receive a refund. The withholding does not change how much tax you ultimately owe — it just changes when you pay it.

Backup withholding can remain in place for months or years if the underlying issue is not resolved. The payer will continue withholding 24% from every payment until the IRS sends a notice telling them to stop. This means the cash impact can be significant over time.

How to stop backup withholding

To stop backup withholding, you must address the reason it started. If the issue was an incorrect taxpayer identification number, provide the correct number to the payer on a new Form W-9 (or the equivalent form for your type of income). The payer will then notify the IRS, and backup withholding will stop within a reasonable time.

If you did not certify that you are not subject to backup withholding, sign the required certification and return it to the payer. This is usually part of the W-9 form. The payer needs your signature confirming that you have provided a correct taxpayer identification number and that you are not subject to backup withholding under IRS rules.

If the IRS initiated backup withholding because of underreporting, you will need to contact the IRS directly. The IRS may require you to file amended returns or resolve the discrepancy before they will lift the backup withholding order. You can reach the IRS at 1-800-829-1040 or through your local IRS office. Bring documentation showing that the income was reported correctly or that the discrepancy has been resolved.

What documents and information you need

To resolve backup withholding, have the following ready: your taxpayer identification number (Social Security number or employer identification number), the name and contact information of the payer (the bank, brokerage, or business paying you), and documentation of the income you received (1099 forms, bank statements, or payment records).

If the issue involves underreporting, gather copies of your prior tax returns and any correspondence from the IRS about the discrepancy. If you are working with a tax professional or accountant, they can help you obtain these documents and communicate with the IRS on your behalf.

When you provide a corrected taxpayer identification number or sign a new W-9, keep a copy for your records. Ask the payer to confirm in writing that they have received the corrected information and will stop backup withholding.

Backup withholding and your tax return

When you file your tax return, report all income you received, including the amount that was subject to backup withholding. Do not reduce your reported income by the 24% that was withheld. The IRS already knows about the withholding because the payer reported it on a Form 1099-INT, 1099-DIV, 1099-MISC, or similar document.

The backup withholding amount will appear on your return as a payment you made to the IRS during the year. If your total tax liability is less than the backup withholding amount, you will receive the difference as a refund. If your tax liability is more, you will owe the difference. This is the same process as with any other tax withholding.

If you filed a return for a year in which backup withholding was taken and you did not report the income correctly, amend your return using Form 1040-X (Amended U.S. Individual Income Tax Return) or the equivalent form for your situation. Correcting the return may help resolve the underreporting issue and allow the IRS to lift the backup withholding order.

Frequently Asked Questions

Can backup withholding be reversed if it was taken by mistake?

Yes. If backup withholding was taken in error — for example, because you provided a correct taxpayer identification number but the payer entered it incorrectly — you can request a refund once the issue is corrected. Contact the payer first to confirm the error, then file your tax return reporting the correct income. The IRS will credit the backup withholding against your tax liability and refund any excess.

Does backup withholding apply to my paycheck from my job?

Backup withholding rarely applies to wages from an employer. It is designed for non-wage income like interest, dividends, and freelance payments. If your employer is withholding 24% from your paycheck, it is usually for a different reason, such as a missing or incorrect W-4 form. Contact your employer's payroll department to correct the issue.

What if I do not have a taxpayer identification number?

If you are a U.S. citizen or resident alien, you need a Social Security number to receive most types of income. If you do not have one, you can apply through the Social Security Administration. Until you obtain one, backup withholding will likely remain in place. If you are a nonresident alien, you may need an Individual Taxpayer Identification Number (ITIN) instead, which you can apply for through the IRS.

How long does it take for backup withholding to stop after I fix the problem?

Once you provide a corrected taxpayer identification number or sign the required certification, the payer should notify the IRS within a few business days. The IRS typically lifts the backup withholding order within one to two weeks, though it can take longer depending on IRS processing times. Ask the payer to confirm in writing when they have submitted the correction.

Will backup withholding affect my credit score or show up on my credit report?

No. Backup withholding is a tax collection method and does not appear on your credit report. It does not affect your credit score. However, if backup withholding is in place because you owe back taxes or have underreported income, and you do not resolve the underlying tax issue, that could eventually lead to other collection actions that do affect your credit.