What is Backup Withholding?

Definition & Examples of Backup Withholding

Woman at her home, holds coffee cup and finishing paperwork
•••

Drakula & Co. / Getty Images

Backup withholding is tax withheld from certain payments issued by businesses and banks. You may be subject to backup withholding if you have incorrectly reported your taxpayer identification number or underreported income on past tax returns.

Learn what payments are subject to backup withholding and how to have backup withholding stopped.

What Is Backup Withholding?

Backup withholding requires a payer to withhold tax from a payment that is not usually subject to withholding. This may happen because:

  • You don't give the payer your taxpayer identification number (TIN) correctly.
  • The IRS notifies the payer that your TIN is incorrect.
  • You have underreported dividends or interest on your income tax return.
  • You fail to certify that you aren't subject to backup withholding.

The backup withholding rate is currently 24% of the total amount being paid, effective for the 2018 tax year and beyond. This may be withheld from payments made by business owners, banks, brokerages, or other payers.

How Backup Withholding Works

When you open an account, make an investment, or begin to receive 1099 payments, you must provide your taxpayer identification number (TIN). In many cases, you must certify that it is correct on a Form W-9.

If you fail to do so, or if you have previously underreported income tax, these payments may be subject to backup withholding until the error is corrected or your tax bill has been paid.

Payments that may be subject to backup withholding include: 

  • Interest payments (​Form 1099-INT)
  • Dividends (Form 1099-DIV)
  • Rents, profits, or other income (​Form 1099-MISC)
  • Commissions, fees, or other payments for work performed as an independent contractor (​Form 1099-MISC)
  • Payments by brokers and barter exchange transactions (​Form 1099-B)
  • Payment Card and Third-Party Network Transactions (​Form 1099-K)
  • Royalty payments (​Form 1099-MISC)
  • Gambling winnings that aren't subject to regular gambling withholding (Form W-2G)

Some types of payments are excluded from backup withholding. These include:

  • Real estate transactions, foreclosures, and abandonments
  • Cancelled debts
  • Long-term care benefits
  • Retirement account distributions
  • Employee stock ownership plan distributions
  • Unemployment compensation
  • State or local income tax refunds 
  • Qualified tuition program earnings

Backup withholding will be taken out of your payment and deposited with the IRS. Payers must provide you with information on the amount being withheld from each check or other payment you receive.

For Payers

You must file Form 945 with the IRS for backup withholding.

Form 945 is an annual report form, used for reporting all backup withholding for all payees for the year. You can e-file this form or send it by mail. If you send it by mail, where you send the form depends on whether you are making a payment.

Generally, the deposit rules for Form 945 are the same as those for Form 941 (payroll taxes). You are a semiweekly or monthly depositor, depending on the amount deposited.

You may use the IRS e-file (EFTPS) system or make deposits using the deposit coupon. Instructions for Form 945 provide information on how these deposits work.

At the end of the year, you must report the total backup withholding, along with the total amount paid for the year, on Form 1099-MISC. 

How to Stop Backup Withholding

To stop backup withholding, you must correct the reason that caused the backup withholding in the first place.

  • Provide your correct taxpayer identification number (Social Security number, employer identification number, or individual taxpayer identification number)
  • Resolving the underreported income and paying the amount you owe to the IRS
  • Filing any missing tax returns

Key Takeaways

  • Backup withholding is tax withheld from certain payments issued by businesses and banks. It is withheld at a 24% tax rate.
  • You may be subject to backup withholding if you have incorrectly reported your taxpayer identification number or underreported income on past tax returns.
  • Payers must deposit backup withholding with the IRS by filing Form 945.
  • To stop backup withholding, you must correct the error that led to it, including making any payment you owe to the IRS or filing missing tax forms.