Backup withholding is a federal tax withholding requirement imposed by the IRS when payee information is missing, incorrect, or unverified. If you’re affected, understanding how to stop backup withholding quickly is critical to cash flow and compliance.
This guide explains what triggers backup withholding, how to stop it, and how to prevent it from happening again—especially for businesses managing high volumes of payee data.
Why Backup Withholding Happens
Backup withholding happens when the IRS cannot validate a payee’s taxpayer information. The current backup withholding rate is 24% of reportable payments under IRC §3406.
Common triggers include:
- An incorrect or missing TIN
- Failure to return a valid Form W-9
- IRS notification of underreported income
- A mismatch between IRS records and payer files
Backup withholding applies to many reportable payments, including interest, dividends, and certain contractor payments.
Can Backup Withholding Be Stopped?
Yes. Backup withholding can be stopped once the IRS-required correction is completed.
In most cases, withholding stops after:
- Correcting payee data
- Submitting a valid W-9
- Resolving the issue identified in an IRS notice
However, withholding does not stop automatically in all situations. Some cases require direct IRS confirmation before payments can be resumed without withholding.
How to Stop Backup Withholding
Stopping backup withholding requires addressing the specific trigger identified by the IRS or payer. Follow these steps in order:
Submit a Corrected Form W-9
A corrected Form W-9 is the fastest way to stop backup withholding in most cases.
The payee must provide:
- Legal name as shown on IRS records
- Correct TIN (SSN or EIN)
- Proper certification signature
Once received, the payer should update their records immediately. Instructions for submitting Form W-9 are available from the IRS.
Submitting a W-9 is also critical for accurate information reporting, including how to report Form series 1099.
Respond to an IRS Backup Withholding Notice
Some situations require a formal response to an IRS backup withholding notice.
Common notices include:
- CP2100 or CP2100A (B-Notice)
- Underreported income notifications
In these cases, withholding must continue until the IRS confirms compliance. Publication 1281 outlines required payer and payee actions.
Verify TIN Information
TIN verification prevents repeat withholding issues.
Before issuing payments, businesses should confirm that:
- Name and TIN combinations match IRS records
- Payee classifications are correct
- Records are validated before year-end reporting
TIN validation is especially important for organizations managing complex reporting obligations, verifying a TIN and Name combination upon onboarding, far before reporting season, can eliminate penalties and hours of manual rework for your business units.
How Long Does Backup Withholding Last?
Backup withholding lasts until the IRS-required correction is accepted.
There is no fixed timeframe. Resolution depends on:
- How quickly the payee responds
- Whether IRS confirmation is required
- Processing timelines at the IRS
Even after submitting corrected information, withholding may continue temporarily until records are updated across systems.
What Happens to Backup Withheld Taxes?
Backup withheld taxes are not lost.
The withheld amount is:
- Remitted to the IRS by the payer
- Credited to the payee’s tax account
- Claimed as a credit on the payee’s federal income tax return
Refunds are issued by the IRS—not the payer—after the return is processed.
How Businesses Can Prevent Backup Withholding
Prevention starts upstream with data accuracy.
Businesses can reduce risk by:
- Collecting W-9s during onboarding
- Validating TINs before issuing payments
- Monitoring IRS notices proactively
- Auditing payee data before filing season
Strong identity controls also reduce downstream reporting errors, including issues tied to how to report information returns.
FAQs
How do I stop IRS backup withholding?
You must correct the issue that triggered withholding—typically by submitting a valid Form W-9 or responding to an IRS notice.
Does submitting a W-9 automatically stop backup withholding?
Not always. Some cases require IRS confirmation before withholding can stop.
How long does it take to stop backup withholding?
It varies. Withholding may stop immediately after correction or continue until IRS records are updated.
Can backup withholding be refunded?
Yes. Withheld amounts are claimed as a credit on the payee’s federal tax return.
How can businesses avoid backup withholding issues?
By validating TINs early, maintaining accurate payee records, and monitoring IRS notices before year-end reporting.