Which Payments are Subject to Backup Withholding?

Backup withholding is a federal tax withholding requirement that may apply to certain “reportable payments” when specific conditions are met. In most cases, backup withholding applies to payments that are reported on Forms 1099 or Form W-2G and are not otherwise subject to regular withholding. The current backup withholding rate is 24%.

What Is Backup Withholding?

Backup withholding is the requirement for a payer to withhold tax from certain non-payroll payments to help ensure the IRS receives the tax due on that income. It may apply when the payee fails to provide a correct taxpayer identification number (TIN), when the IRS notifies the payer that the payee’s TIN is incorrect, or in certain cases involving underreported interest or dividend income.

Official IRS references: IRS Topic No. 307 (Backup withholding) and Backup withholding (IRS).

Payments Subject to Backup Withholding

According to the IRS, backup withholding can apply to most kinds of payments reported on Forms 1099 and Form W-2G. Common examples include:

• Interest payments (commonly reported on Form 1099-INT)
• Dividends (Form 1099-DIV)
• Payment card and third-party network transactions (Form 1099-K)
• Patronage dividends (Form 1099-PATR), but only if at least half the payment is in money
• Rents, profits, or other gains (often reported on Form 1099-MISC, depending on the payment type)
• Commissions, fees, or payments for work performed as an independent contractor (Form 1099-NEC)
• Payments by brokers and barter exchanges (Form 1099-B)
• Payments by fishing boat operators, but only the portion paid in cash and representing a share of the catch proceeds (reported under the applicable information return rules)
• Royalty payments (commonly Form 1099-MISC)
• Gambling winnings if not subject to regular gambling withholding (Form W-2G)
• Taxable grants
• Agriculture payments

Official IRS reference list: Fast facts to help taxpayers understand backup withholding and Topic No. 307.

When the Payer Must Begin Backup Withholding

The IRS explains that a payer generally must withhold at the flat 24% rate when one of the following applies:

• The payee does not provide a TIN in the required manner.
• The IRS notifies the payer that the TIN provided is incorrect (a name/TIN mismatch under IRS records).
• The IRS notifies the payer to begin withholding due to payee underreporting of interest or dividends (after IRS notice procedures).
• The payee fails to certify that they are not subject to backup withholding when certification is required.

Official IRS reference: Topic No. 307 (Withholding rules).

How to Prevent or Stop Backup Withholding

In many situations, backup withholding can be prevented or stopped by providing the payer with the correct legal name and TIN and completing the required certification (often using Form W-9 for U.S. persons). If the IRS mismatch issue continues, additional verification steps may be required under the IRS “B-Notice” procedures.

Official IRS references: Topic No. 307 and Publication 1281 (Backup Withholding for Missing and Incorrect Name/TIN(s)).

How Backup Withholding Is Reported

If backup withholding is taken from a payment, the amount withheld is generally shown as federal income tax withheld on the applicable information return (for example, Form 1099-INT, 1099-DIV, 1099-NEC, 1099-MISC, 1099-K, 1099-B, or Form W-2G). The payee can usually claim the withholding as a credit on their federal income tax return for the year the income was received.

Official IRS reference: Topic No. 307 (Credit for backup withholding).

Summary

Backup withholding can apply to many common types of non-payroll payments that are reportable on Forms 1099 and W-2G. If a payee fails to provide a correct TIN or otherwise triggers backup withholding rules, the payer may be required to withhold 24% from reportable payments until the issue is corrected. For the most current rules and examples, always confirm details on IRS.gov.