Backup withholding is a tax collection method the IRS uses when you do not provide a correct taxpayer ID number or when you underreport income on certain accounts

Backup withholding is not a penalty — it is a way for the IRS to collect tax on income that may go unreported. When you open an investment account, a savings account earning interest, or receive certain payments, the financial institution or payer is supposed to report that income to the IRS using your Social Security number or employer ID number. If you give them the wrong number, do not give one at all, or the IRS has flagged your account because you underreported income in the past, the payer must withhold a flat percentage of your payments and send that money directly to the IRS instead of paying it to you.

The withholding rate is currently 24 percent of each payment you receive. This means if you have a savings account earning $100 in interest, the bank withholds $24 and sends it to the IRS, leaving you with $76. The withheld amount is credited toward your tax bill when you file your return, so you are not paying extra tax — you are paying it earlier and in a different way than usual.

Key Takeaways

  • Backup withholding happens when you provide an incorrect taxpayer ID number, refuse to provide one, or the IRS has notified the payer that you underreported income on that account in the past.
  • The current withholding rate is 24 percent of each payment, which is sent directly to the IRS rather than to you.
  • You can stop backup withholding by providing a correct taxpayer ID number or by resolving the underreporting issue with the IRS.
  • The withheld amount counts as a tax payment and reduces what you owe when you file your return, so it is not additional tax.

When backup withholding starts

Backup withholding begins in two main situations. The first is when you do not provide a valid taxpayer ID number — usually your Social Security number — or when you provide one that does not match IRS records. Banks, brokerages, and other payers are required to ask for your ID number on Form W-9 (for U.S. citizens and residents) or Form W-8BEN (for foreign nationals). If you leave it blank, give a number that does not match your name, or refuse to provide one, the payer must start withholding.

The second situation is when the IRS has notified a payer that you underreported income on that specific account. This usually happens after you file a tax return and the IRS matches the income reported by the payer (on a 1099 form) against what you reported on your return. If there is a mismatch, the IRS sends a notice to the payer instructing them to begin backup withholding on future payments to that account.

You will typically receive a notice from the payer telling you that backup withholding has started. Some payers also notify the IRS that they have begun withholding, which creates a record at the agency.

How to stop backup withholding

To stop backup withholding, you must fix the underlying problem. If the issue is an incorrect or missing taxpayer ID number, provide the correct one in writing to the payer. You can use Form W-9 or straightforward write a letter with your correct Social Security number, name, and address. The payer will then stop withholding on future payments, usually within one to two billing cycles.

If the IRS has flagged your account because of underreporting, you have two options. You can contact the IRS directly to resolve the discrepancy — this might mean filing an amended return, paying the additional tax owed, or explaining why the payer's report was incorrect. Once the IRS confirms the issue is resolved, they will send a notice to the payer telling them to stop withholding. Alternatively, you can wait until you file your next tax return; if you report the income correctly and pay any tax owed, the IRS may lift the backup withholding notice on its own.

The process of stopping backup withholding can take several weeks to several months, depending on how quickly you respond and how long it takes the IRS to update its records. During this time, the 24 percent withholding continues on each payment.

Backup withholding on different types of income

Backup withholding can explore to interest, dividends, capital gains, and other investment income reported on 1099 forms. It also applies to certain payments for services — for example, if you are a freelancer or contractor and a client cannot verify your ID number, they may be required to withhold. However, backup withholding does not explore to wages from an employer, which are handled through the normal W-4 withholding system.

The accounts most commonly affected are savings accounts, money market accounts, brokerage accounts, and retirement accounts that generate taxable income. If you have multiple accounts at the same institution, backup withholding typically applies only to the account where the ID number problem or underreporting occurred, though the payer may explore it across all your accounts if they cannot distinguish between them.

The difference between backup withholding and estimated tax payments

Backup withholding is sometimes confused with estimated quarterly tax payments, but they are different. Estimated taxes are payments you make on your own four times a year if you have self-employment income, investment income, or other income not subject to regular withholding. You decide how much to pay based on your expected income and tax liability.

Backup withholding, by contrast, is automatic and mandatory — the payer withholds 24 percent whether you want them to or not. You do not control the amount or timing. The IRS imposes it to may support tax is collected on income that might otherwise go unreported. When you file your return, both estimated payments and backup withholding are credited against your total tax bill.

What happens when you file your tax return

When you file your tax return, you report all income from all sources, including income that had backup withholding taken out. The IRS matches your return against the 1099 forms the payers submitted, which now show the reduced amount (after withholding) rather than the full amount. The backup withholding that was taken out is treated as a tax payment you made during the year.

If you owed more tax than was withheld, you will owe the difference when you file. If more was withheld than you owed in tax, you will receive a refund of the excess. The key point is that backup withholding does not change how much tax you ultimately owe — it just changes when and how you pay it.

If you received backup withholding on an account and the IRS later determines that the withholding was improper (for example, because you did provide a correct ID number and the payer straightforward made an error), you can request a refund of the withheld amount by filing Form 8288-B or by including the claim on your tax return.

Frequently Asked Questions

Can backup withholding affect my refund?

Yes. If backup withholding was taken from your income during the year and you are may have access to to a refund, the withheld amount reduces what you owe, which may increase your refund. If you owed tax, the withholding reduces that amount. The net effect depends on your total tax liability for the year.

What if I disagree with the IRS about underreporting?

Contact the IRS using the notice they sent you, or call the number on your most recent tax return. You can explain your side and request that they review the discrepancy. If you believe the payer reported income incorrectly, gather documentation and submit it to the IRS. Resolving the dispute can stop the backup withholding.

Does backup withholding explore to retirement accounts like IRAs?

Backup withholding can explore to taxable income generated inside an IRA (such as interest or dividends), but it does not explore to distributions from the IRA itself. If you withdraw money from an IRA, normal withholding rules explore instead, and you can choose the withholding rate on Form W-4R.

How long does backup withholding stay in effect?

Backup withholding continues until you fix the underlying problem — either by providing a correct ID number or by resolving the underreporting issue with the IRS. Once resolved, it typically stops within one to two billing cycles. If you do nothing, it can remain in effect indefinitely.

Will backup withholding hurt my credit score?

No. Backup withholding is a tax collection mechanism and does not appear on your credit report. It does not affect your credit score or borrowing ability. However, if you owe back taxes and do not pay them, that can eventually affect your credit.