What Is Backup Withholding? (And When You Have to Do It)
Backup withholding is a 24% tax a business must withhold from certain payments when a payee's tax info is missing or wrong. Here's when it applies, how it works, and how to avoid triggering it.
Most contractor payments go out in full — the contractor handles their own taxes. But in specific situations, the IRS requires the payer to hold back a chunk and send it directly to the IRS. That's backup withholding. Here's what it is and how to avoid the paperwork headache it creates.
The plain-English definition
Backup withholding is a 24% tax that a business must withhold from certain payments and remit to the IRS — instead of paying the full amount to the payee — when the payee's taxpayer info is missing or flagged as incorrect.
It's a backstop: if the IRS can't reliably match income to a taxpayer, it makes the payer collect tax up front so nothing slips through.
When is backup withholding required?
You generally must apply 24% backup withholding to a reportable payment (like contractor pay) if:
- The payee didn't give you a TIN — e.g., they never returned a W-9, or left the TIN blank.
- The IRS notified you the TIN is incorrect (a "B-notice") and it wasn't corrected.
- The IRS notified you the payee underreported interest/dividends (less common for typical contractor payments).
- The payee failed to certify they're not subject to backup withholding when required.
For most small businesses, #1 is the one you'll actually hit: a contractor who won't provide a valid W-9.
What it looks like in practice
Say you owe a contractor $2,000 but they never returned a W-9. You'd be required to:
- Pay the contractor $1,520 ($2,000 − 24%)
- Send $480 to the IRS as backup withholding
- Report it on the contractor's 1099 and on Form 945
It's extra work and an awkward conversation — which is exactly why the fix is preventive.
How to avoid backup withholding entirely
The whole thing is avoidable with one habit: collect a valid [W-9](/tools/w9-generator) before the first payment. A properly completed W-9 gives you the correct TIN and the payee's certification that they're not subject to backup withholding — which is all you need to pay them in full.
- Send a W-9 during contractor onboarding with the W-9 generator.
- Require it back before paying — no W-9, no payment.
- Track payments and tax info together with a contractor payments tool.
See the full workflow in How to Pay Independent Contractors.
Frequently asked questions
What is backup withholding?
It's a 24% tax a business must withhold from certain payments and send to the IRS when a payee's taxpayer ID is missing or incorrect, instead of paying the full amount.
What is the backup withholding rate?
24% of the reportable payment.
When do I have to do backup withholding?
Most commonly when a contractor doesn't provide a valid W-9/TIN, or when the IRS notifies you their TIN is wrong (a B-notice) and it isn't fixed.
How do I avoid backup withholding?
Collect a valid W-9 before the first payment. A completed W-9 provides the correct TIN and certification, so you can pay in full.
What tool helps me collect W-9s and avoid this?
Use a platform like Holdings that collects W-9s during onboarding and tracks contractor payments — so you have valid tax info before any money goes out.
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Backup withholding is 24% you're forced to hold back when tax info is missing — and it's almost entirely preventable. Collect a W-9 before the first payment, track everything with contractor payments, and it never comes up.