Payroll
Backup Withholding
A mandatory 24% federal tax withholding a business must take out of payments to a payee who won't provide a valid taxpayer ID.
Normally you pay contractors gross and they handle their own taxes. Backup withholding is the exception: if a payee refuses to give you a W-9, gives you an obviously wrong TIN, or the IRS notifies you of a name/TIN mismatch, you must withhold 24% from their payments and remit it to the IRS.
The liability runs the wrong way for the payer. If you should have backup-withheld and didn't, the IRS can collect the tax from you — the business — not just the contractor who caused the problem.
Withheld amounts are reported on Form 945 and credited to the payee, who claims them on their own return. In practice, the easiest compliance path is prevention: collect a complete, signed W-9 before the first payment.
Common pitfalls
- Ignoring a CP2100 'B notice' from the IRS about a TIN mismatch — the notice starts a clock that obligates you to begin withholding
- Assuming backup withholding is the contractor's problem — the payer is on the hook for amounts that should have been withheld
- Forgetting the Form 945 annual filing once you do withhold — it's a separate return from your payroll 941s
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