Subject to Backup Withholding: Causes, B Notice, and How to Stop It

If you are subject to backup withholding, a bank, brokerage, client, or other payer is required to hold back 24% of certain payments owed to you and send that money straight to the IRS. It happens when there’s a problem with your taxpayer identification number or the IRS has flagged you for underreporting interest or dividends. The withheld money isn’t a penalty — you claim it as a credit when you file — but it stays out of your pocket until then, and it won’t stop until you fix the underlying trigger.¹

The 24% rate is set by federal law and applies flatly to every affected dollar, regardless of your tax bracket or what a W-4 would have told a payer to withhold from wages.²

Why You’re Subject to It

Federal law lists four triggers. Two can hit any reportable payment; two apply only to interest and dividends.²

A Missing or Wrong TIN

This is the most common cause. If you never gave the payer a Taxpayer Identification Number (your SSN, EIN, or ITIN), gave one that’s wrong, or your name and number don’t match on the Form W-9 you submitted, the payer has to start withholding.¹ It often traces back to a new account where the W-9 was skipped or filled out incorrectly.

If you don’t have a TIN yet, you can write “Applied For” on the W-9. For interest and dividend accounts, that gives you a 60-calendar-day grace period. For other payment types, like contractor income, there is no grace period — withholding applies until you provide a valid number.³

An IRS Notice to the Payer That Your TIN Doesn’t Match

Twice a year, in October and the following April, the IRS sends payers CP2100 or CP2100A notices listing accounts where the TIN and name don’t match its records.⁴ The payer then contacts you with a “B Notice” and, if you don’t fix the problem, starts withholding.

Underreported Interest or Dividends

If the IRS finds that you failed to report interest or dividend income on a previous return, it can direct payers to begin backup withholding on future interest and dividend payments. This trigger doesn’t reach contractor pay, royalties, or other 1099 income — only interest and dividends.²

Failure to Certify

Signing a W-9 certifies, under penalty of perjury, that you’re not subject to backup withholding for underreporting. If the IRS has told you that you are, you must cross out that certification on the W-9. Failing to certify properly is itself a trigger.⁵

Which Payments Get Hit

Backup withholding reaches most income reported on Forms 1099 and W-2G:¹

Interest from bank accounts and bonds (1099-INT)
Dividends from stocks and mutual funds (1099-DIV)
Nonemployee compensation and independent contractor payments (1099-NEC)
Royalties and rents (1099-MISC)
Broker and barter exchange transactions (1099-B)
Payment card and third-party network transactions (1099-K)
Gambling winnings (W-2G); for 2026, the reporting and withholding threshold is $2,000⁶

Wages on a W-2 aren’t subject to backup withholding — regular payroll withholding covers those. Retirement account distributions, real estate transactions, cancelled debts, foreclosures, unemployment compensation, and distributions from Archer MSAs or ESOPs are also excluded even though they appear on information returns.¹

The B Notice From Your Payer

When the IRS flags a TIN problem, the payer doesn’t start withholding without warning. You’ll get a letter called a B Notice, and what you have to send back depends on whether it’s your first or second within a three-year window.⁷

A First B Notice is usually simple. Complete a new Form W-9 with your correct name and TIN, sign it, and return it to the payer. Most typos and data-entry errors clear up here.

A Second B Notice, within three years of the first, needs more than a fresh W-9. If your TIN is a Social Security number, you have to send a copy of your Social Security card. If it’s an EIN, you need to obtain Letter 147C from the IRS confirming that your name and number match on its side. If the mismatch actually sits with the Social Security Administration — a name change after marriage is the classic example — you’ll need to visit a local SSA office to update its records first, then confirm the fix with your payer.

How to Stop Backup Withholding

The fix depends on the trigger. Getting the right one matters, because your money keeps flowing to the IRS until the payer is satisfied.

For a TIN problem. Submit a properly completed Form W-9 with the correct number. If you’re responding to a Second B Notice, include your Social Security card or IRS Letter 147C.⁷ Once the payer has the corrected information, backup withholding must stop within 30 calendar days.⁸

For underreported interest or dividends. Resolve it with the IRS directly. That usually means filing an amended return to report the missing income and paying any tax owed, or responding to the IRS notice explaining why the original return was correct. You can also request a determination from the IRS that the underreporting has been corrected. Once the IRS is satisfied, it notifies your payers to stop.¹

For failure to certify. Send the payer a corrected W-9 with the certification handled properly for your situation.⁵

Getting the Withheld Money Back

The 24% isn’t lost. It’s a prepayment of your federal income tax. The amount withheld will appear on the Form 1099 or W-2G your payer sends you, in the “Federal income tax withheld” box. Report it on your Form 1040 along with any other withholding you had for the year. It reduces your tax bill dollar for dollar, and if your total withholding exceeds what you owe, the excess comes back as a refund.¹

The catch is that you have to file. No return, no credit.

Who Isn’t Subject to It

Certain payees are exempt and claim it by entering an exemption code on the W-9. The list covers corporations, tax-exempt organizations under section 501(a), U.S. and foreign governments, state and local governments, registered securities and commodities dealers, REITs, regulated investment companies, financial institutions, and IRAs.⁹ Sole proprietors and individuals receiving 1099 income aren’t on the list.

Foreign individuals use Form W-8BEN instead of a W-9 to establish non-U.S. status. Their income may be subject to a separate 30% withholding under different rules, and failing to submit a valid W-8BEN can itself trigger the 24% backup rate.¹⁰

1
Internal Revenue Service. Backup Withholding
2
Office of the Law Revision Counsel. 26 U.S. Code 3406 – Backup Withholding
3
Internal Revenue Service. Instructions for the Requester of Form W-9
4
Internal Revenue Service. Understanding Your CP2100 or CP2100A Notice
5
Internal Revenue Service. Form W-9 (Rev. March 2024) Request for Taxpayer Identification Number and Certification
6
Internal Revenue Service. Instructions for Forms W-2G and 5754
7
Internal Revenue Service. Backup Withholding “B” Program
8
eCFR. 26 CFR 31.3406(d)-5 – Backup Withholding When the Service or a Broker Notifies the Payor
9
Internal Revenue Service. Instructions for the Requester of Form W-9
10
Internal Revenue Service. Instructions for Form W-8BEN