Definition
Backup withholding requires a payer to withhold tax, at 24 percent under current IRS guidance, from certain payments reported on Forms 1099 when the payee fails to give a correct taxpayer identification number (TIN), or when the IRS notifies the payer that the payee underreported interest or dividends. Payees generally give the TIN on Form W-9 under penalties of perjury. The payer deposits the tax and reports it, and payers can be liable for amounts they should have withheld.
Why it matters in an audit or review
A weak vendor onboarding process leads to missing W-9s, TIN mismatches and unwithheld tax. Auditors test whether payees have W-9s on file, whether TIN matching is performed before filing, and whether any IRS notices were received and acted upon.
Example
Illustrative: a company pays a contractor $10,000 and has no TIN. If backup withholding applies, it withholds 24% x $10,000 = $2,400, pays the contractor $7,600, deposits the $2,400, and reports both amounts on the Form 1099.
Common mistakes
- Paying first and collecting the W-9 afterward.
- Ignoring an IRS notice about a TIN mismatch.
Sources
- Internal Revenue Code section 3406
- IRS, Backup Withholding: https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding
- IRS, Instructions for the Requester of Form W-9
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error