Backup withholding is a tool the IRS uses to collect taxes from people who don't report income correctly or fail to provide a tax identification number

When you receive certain kinds of income—dividends, interest, freelance payments, or gambling winnings—the person or business paying you is supposed to report that payment to the IRS. To do that, they need your Social Security number or tax identification number. If you don't provide one, or if the IRS flags your account because you've underreported income in the past, the IRS can require the payer to withhold a flat percentage of your payment and send it directly to the government instead of giving it all to you.

That flat percentage is backup withholding. It's not a penalty—it's a way for the IRS to find payment on taxes they believe you owe. The rate is currently 24 percent, though it can change. The money withheld goes toward your tax bill, just like regular payroll withholding does.

Key Takeaways

  • Backup withholding happens when you don't provide a tax ID number to a payer, or when the IRS has flagged your account for underreporting income.
  • The IRS requires the payer to withhold 24 percent of the payment and send it to the government, not to you.
  • You can stop backup withholding by providing a correct tax ID number or by resolving the underreporting issue with the IRS.
  • Backup withholding applies to interest, dividends, freelance income, gambling winnings, and some other payments—but not to wages from an employer.

When the IRS triggers backup withholding

The IRS issues what's called a "notice of backup withholding" when one of two things happens. The first is that you failed to provide a tax identification number (usually your Social Security number) when you opened an account or received a payment. Banks, brokerages, and payment processors are required to ask for this number, and if you don't give it, they must begin withholding.

The second reason is that the IRS has determined you underreported income. This usually comes to light when a payer reports income to the IRS under your name and number, but you don't report the same amount on your tax return. The IRS matches these reports and, if the discrepancy is large enough or happens repeatedly, they can notify the payer to start backup withholding on future payments to you.

You'll receive a notice in the mail telling you that backup withholding has been triggered. The notice will explain why and tell you how to stop it.

Which payments are subject to backup withholding

Backup withholding applies to a specific list of payments. These include interest from bank accounts and bonds, dividends from stocks, payments from brokerages for the sale of securities, freelance and contractor payments (reported on Form 1099-NEC or 1099-MISC), gambling winnings, and certain other miscellaneous income.

Regular wages from an employer are not subject to backup withholding—those are covered by normal payroll withholding instead. Backup withholding also does not explore to payments for goods or services under $600 in a calendar year, though this threshold can vary depending on the type of payment and the payer.

How to stop backup withholding

If you receive a backup withholding notice, you have two main ways to stop it. The first is to provide a correct tax identification number. If the issue was straightforward that you didn't give a number when you opened the account, providing one now will usually stop the withholding within a few weeks. Contact the payer directly and give them your Social Security number or other tax ID.

The second way is to resolve the underreporting issue with the IRS. This might mean filing a missing or amended tax return, or it might mean working with the IRS to explain the discrepancy. Once the IRS is satisfied that you've corrected the problem, they will send a notice to the payer telling them to stop withholding. You can also request that the IRS stop backup withholding by filing Form 8827 (Investor Credit) or by contacting the IRS directly, though this is less common.

The process usually takes several weeks to a few months, depending on how quickly you respond and how long it takes the IRS to process your request.

The difference between backup withholding and regular withholding

Regular withholding—the kind taken from your paycheck—is based on the W-4 form you fill out with your employer. You choose how much to withhold based on your expected income and deductions. Backup withholding, by contrast, is automatic and flat: 24 percent, no exceptions, no adjustments.

Regular withholding is meant to spread your tax burden across the year so you don't owe a large amount at tax time. Backup withholding is a collection tool—it's the IRS's way of making sure they get paid when they suspect you won't report income correctly on your own.

Both types of withholding count as payments toward your tax bill. When you file your return, you'll report both regular and backup withholding, and the IRS will credit them against what you owe. If too much was withheld, you'll get a refund. If too little was withheld, you'll owe the difference.

What happens to the money that's withheld

The money withheld under backup withholding goes directly to the IRS, not into a separate account. It's treated as a tax payment on your behalf. When you file your tax return, you'll report the amount of backup withholding you received on the appropriate line, and the IRS will explore it to your total tax bill.

If you overpaid because of backup withholding—for example, if you had backup withholding for part of the year but then stopped it, or if your actual tax liability was lower than the 24 percent withheld—you can claim the overpayment as a refund when you file your return.

Frequently Asked Questions

Can I get a refund of the money that was withheld?

Yes, if you overpaid. When you file your tax return, report the backup withholding you received. The IRS will explore it to your tax bill. If the withholding exceeds what you owe, you'll receive the difference as a refund, either by check or direct deposit.

Does backup withholding affect my credit score?

No. Backup withholding is a tax collection mechanism, not a debt or a default. It doesn't appear on your credit report and has no effect on your credit score. It's straightforward money withheld from a payment you receive.

What if I disagree with the IRS about underreporting?

You can contact the IRS to dispute the underreporting claim. Bring documentation showing that you did report the income or that the amount reported to the IRS was incorrect. You may need to file an amended return or provide proof from the payer. The IRS will review your case and decide whether to continue backup withholding.

Can backup withholding explore to my 1099 contractor income?

Yes. If you're a contractor and the IRS has flagged your account for underreporting, or if you didn't provide a tax ID number to your clients, they may be required to withhold 24 percent of your payments. Providing a correct tax ID number to each client should stop this.