Backup withholding: when you must withhold from a contractor

Most businesses never need backup withholding, because they collect a Form W-9 before paying anyone. When a contractor will not provide a taxpayer number, or the IRS sends a notice that the number does not match, the business becomes responsible for withholding. This guide explains when and how.

By Hamza Fida, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 2 minute read.

Short answer

Backup withholding means withholding 24% from reportable payments, such as contractor fees, when the payee has not given a taxpayer number, or the IRS says the number is wrong or withholding is required. You deposit it, report it on Form 945 by January 31 and show it in box 4 of the 1099. A valid Form W-9 before paying prevents most cases.

At a glance

Rate
24%
Applies when
No TIN, or the IRS says the TIN is wrong
Also when
The IRS instructs you to withhold
Report
Form 945, due January 31
On the 1099
Box 4, federal tax withheld
Prevention
Valid Form W-9 before paying
Backup withholding: when you must withhold from a contractorSteps: 1. Compare the list with your records; 2. Send the payee the required notice; 3. Start withholding if not corrected; 4. For a second notice within three years; 5. Stop when a valid correction arrives.THE PROCESS AT A GLANCEBackup withholding: when you must withhold from acontractor1Compare the listwith your recordsCheck for typing errorson your side first2Send the payeethe requirednoticeWith a blank Form W-9,usually within 15business days3Start withholdingif not correctedWithin the time set inthe notice, at 24%4For a secondnotice withinthree yearsThe payee must getvalidation of thenumber from the IRS5Stop when a validcorrectionarrivesWithin the time allowedafter receiving itChecked against official sourcesTax BakersBackup withholding: when you must withhold from a contractorSteps: 1. Compare the list with your records; 2. Send the payee the required notice; 3. Start withholding if not corrected; 4. For a second notice within three years; 5. Stop when a valid correction arrives.THE PROCESS AT A GLANCEBackup withholding: when you mustwithhold from a contractor1Compare the list with your recordsCheck for typing errors on your side first2Send the payee the required noticeWith a blank Form W-9, usually within 15business days3Start withholding if not correctedWithin the time set in the notice, at 24%4For a second notice within threeyearsThe payee must get validation of the numberfrom the IRS or Social SecurityAdministration5Stop when a valid correctionarrivesWithin the time allowed after receiving itChecked against official sourcesTax Bakers
The process at a glance: 1. Compare the list with your records; 2. Send the payee the required notice; 3. Start withholding if not corrected; 4. For a second notice within three years; 5. Stop when a valid correction arrives.

When is backup withholding required?

  • The payee does not give you a taxpayer identification number, or gives one that is obviously invalid.
  • The IRS notifies you, through a notice often called a B notice, that the name and number do not match its records, and the payee does not correct it.
  • The IRS notifies you that the payee is subject to backup withholding for under-reporting interest or dividends.

It applies to reportable payments such as contractor fees, rents and royalties, not to wages, which have their own withholding.

What do you do with a B notice?

  1. Compare the list with your records

    Check for typing errors on your side first.

  2. Send the payee the required notice

    With a blank Form W-9, usually within 15 business days.

  3. Start withholding if not corrected

    Within the time set in the notice, at 24%.

  4. For a second notice within three years

    The payee must get validation of the number from the IRS or Social Security Administration.

  5. Stop when a valid correction arrives

    Within the time allowed after receiving it.

How is it reported?

Deposit backup withholding like other non-payroll federal withholding, through EFTPS. Report the year's total on Form 945, due January 31, and show each payee's amount in the federal income tax withheld box of their Form 1099. The payee claims the amount as a credit on their own return. See Form 1099-NEC.

What if you should have withheld and did not?

The business can be liable for the 24% it failed to withhold, plus penalties. That is why paying a contractor who refuses to provide a W-9 is risky: either withhold or do not pay until the form is received. See Form W-9.

Does it apply to foreign contractors?

Not in the same way. Foreign payees provide Form W-8BEN or W-8BEN-E, and payments to them for services performed abroad are generally not reportable. Payments of US-source income to foreign persons without valid forms fall under the 30% nonresident withholding rules instead. See paying foreign contractors and the 30% withholding.

Received a B notice?

We handle the IRS notice, request corrected details from your payees, and start or stop backup withholding correctly.

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Questions people ask

What is the backup withholding rate?

24% of the reportable payment.

When must I start backup withholding?

When a payee does not provide a taxpayer number, or the IRS tells you the number is wrong and it is not corrected, or the IRS instructs you to withhold.

How is backup withholding reported?

On Form 945, due January 31, and in the federal income tax withheld box of the payee's Form 1099.

Can I avoid backup withholding?

Yes, by collecting a valid Form W-9 before making any payment.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS: Backup withholding
  2. IRS Publication 1281: Backup Withholding for Missing and Incorrect Name/TIN(s)
  3. IRS: About Form 945

Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.

Federal tax formsForm W-9: when to ask for it and how to fill it inFederal tax formsForm 1099-NEC: who files and who receives itPayroll and contractorsHow to pay contractors and file their 1099s

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This guide is general information. It is not tax or legal advice for your situation.