What backup withholding is

Backup withholding is when the IRS requires a payer — your employer, a bank, a brokerage, or anyone sending you money — to hold back a percentage of your payment and send it to the IRS instead of giving it to you. It is not a penalty. It is a collection tool the IRS uses when you have not provided a correct tax identification number, have not reported income correctly in the past, or have underreported interest or dividend income.

The withholding rate is currently 24 percent. If you are supposed to receive $1,000 and backup withholding applies, you get $760 and the IRS gets $240. The payer reports both amounts to the IRS, and the withheld money is credited toward your tax liability when you file your return.

Backup withholding most commonly affects people receiving interest, dividends, or other investment income; freelancers and contractors; and people who have had IRS notices about underreported income. It can also apply to gambling winnings, broker transactions, and certain government payments.

Key Takeaways

  • Backup withholding removes 24 percent from payments you receive and sends it to the IRS, and it stays in place until you resolve the underlying issue with the IRS.
  • The IRS initiates backup withholding when you do not provide a correct tax identification number, have underreported income in the past, or fail to certify that you are not subject to backup withholding.
  • You can stop backup withholding by providing a correct tax identification number, filing past-due returns, or paying an outstanding tax debt that triggered the notice.
  • Payers are legally required to honor a backup withholding notice from the IRS, so contacting your employer or bank alone will not stop it.
  • The withheld amount is credited to your tax account and may result in a refund if more was withheld than you owe.

Why the IRS starts backup withholding

The IRS sends a notice to a payer (not to you first) telling them to begin backup withholding. This happens for three main reasons. First, you did not provide a Taxpayer Identification Number (TIN) — usually a Social Security number — or you provided one that does not match IRS records. Second, you have underreported income on past tax returns, and the IRS has sent you a notice about it. Third, you did not respond to an IRS notice asking you to certify that you are not subject to backup withholding.

Backup withholding can also start if you have an outstanding tax debt and the IRS has issued a levy, or if you have failed to file a required return. The IRS does not always notify you directly before the payer receives the order — you may first learn about it when your payment is reduced.

The payer is required by law to follow the IRS notice. Asking your employer, bank, or broker to ignore it will not work. They face penalties if they do not withhold.

How to stop backup withholding

To stop backup withholding, you must resolve the issue that triggered it. The specific steps depend on why it started. If the problem was a missing or incorrect tax identification number, provide the correct number to the payer in writing. Use Form W-9 (for U.S. citizens and residents) or Form W-8BEN (for foreign nationals). The payer then sends this form to the IRS, and backup withholding usually stops within 30 days.

If backup withholding started because you underreported income, you will need to file an amended return for the year in question using Form 1040-X. File it with the IRS, not with the payer. Once the IRS processes the amended return and your account is current, they will notify the payer to stop withholding. This can take several weeks to several months depending on IRS processing times.

If you have an outstanding tax debt, you can stop backup withholding by paying the debt in full, setting up a payment plan with the IRS, or filing an Offer in Compromise (a settlement for less than you owe). Contact the IRS directly at 1-800-829-1040 to discuss your options.

What happens to the withheld money

The 24 percent that is withheld is sent to the IRS and credited to your tax account. When you file your tax return for that year, the IRS applies the withheld amount against what you owe. If you owe $3,000 in taxes and $2,400 was withheld, you owe $600 more. If you owe $1,500 and $2,400 was withheld, you have an overpayment of $900, which you can claim as a refund or apply to next year's taxes.

The withheld amount appears on your tax return as a payment you made. You do not have to do anything special to claim it — the IRS automatically applies it when they process your return. If you do not file a return for the year backup withholding occurred, the money sits in your IRS account and may eventually be applied to other tax years you owe, or held until you file.

Backup withholding on different types of income

Backup withholding most commonly applies to interest and dividends reported on Form 1099-INT and Form 1099-DIV. Banks and brokerages are required to withhold if they receive an IRS notice. It also applies to income reported on Form 1099-MISC (miscellaneous income, including some freelance and contractor payments) and Form 1099-NEC (nonemployee compensation).

Backup withholding can also apply to gambling winnings, broker transactions, and certain government payments like unemployment benefits or Social Security in specific circumstances. It does not apply to wages from an employer — those are subject to regular income tax withholding instead. If you receive a W-2, backup withholding does not affect your paycheck.

The difference between backup withholding and regular withholding

Regular withholding is what your employer takes from your paycheck based on the Form W-4 you fill out. It is based on your expected annual income and filing status. Backup withholding is different: it is a flat 24 percent taken from specific types of income (usually investment or contractor income) and is triggered by a specific IRS action, not by your choice.

Regular withholding is voluntary in the sense that you control it by adjusting your W-4. Backup withholding is mandatory once the IRS issues a notice to the payer. You cannot opt out. The only way to stop it is to fix the underlying problem — provide the correct TIN, file past-due returns, or resolve the tax debt.

Frequently Asked Questions

Can I get backup withholding removed before I resolve the tax issue?

No. Backup withholding stays in place until you address the specific reason the IRS initiated it. If it was a missing TIN, provide the correct number. If it was underreported income, file an amended return. If it was a tax debt, pay it or set up a payment plan. The payer cannot remove it on their own.

Will backup withholding affect my credit score?

Backup withholding itself does not appear on your credit report. However, if the underlying cause is an unpaid tax debt, that debt can eventually be reported to credit bureaus and harm your score. Resolving the tax issue stops both the withholding and prevents further credit damage.

What if I disagree with the reason for backup withholding?

Contact the IRS at 1-800-829-1040 and ask why backup withholding was initiated. If you believe it was a mistake — for example, you did provide a TIN or you did file a return — explain your situation. The IRS can review the case and may issue a notice to the payer to stop withholding if they find an error.

Does backup withholding happen automatically or do I have to do something?

It happens automatically once the IRS sends a notice to the payer. You do not have to do anything for it to start. However, you must take action to stop it — provide the correct TIN, file a return, or resolve the debt. Simply waiting will not end it.