What is Backup Withholding?

Most payments to independent contractors and other payees reported on information returns are paid in full, with no tax withheld. Backup withholding is the exception: a payer must withhold a flat percentage, set by law, from reportable payments in certain situations. The IRS explains it on its backup withholding page.

When it applies

Common triggers include:

• The payee does not provide a taxpayer identification number when asked
• The IRS notifies the payer that the name and TIN combination is incorrect, often through a CP2100 or CP2100A notice
• The IRS notifies the payer that the payee underreported interest or dividends

What the payer does

Withheld amounts are deposited with other federal taxes and reported annually on Form 945, Annual Return of Withheld Federal Income Tax. The amount withheld is also shown on the payee's Form 1099, so the payee can claim it as a credit.

How to avoid it

The simplest prevention is collecting a complete Form W-9 from every vendor before the first payment. When the IRS sends a notice about a mismatched TIN, follow the "B notice" process in the instructions, which includes requesting a new W-9 within set timeframes.

In the books

Record backup withholding as a liability when you withhold it from a payment, and clear it when deposited. See Form 1099-NEC basics and taxpayer identification number.

Related terms

• Taxpayer Identification Number (TIN): A taxpayer identification number is the number the IRS uses to identify a person or entity, such as an SSN, EIN or ITIN.

Browse more definitions in the small business glossary.