Backup withholding and a missing W-9 are linked by one rule: when a payee does not give a payer its taxpayer identification number, the payer must withhold 24% of reportable payments, such as nonemployee pay, and send it to the IRS. It also starts when the IRS flags a name and TIN mismatch the payee does not fix.
When backup withholding starts for a missing W-9
Backup withholding for a missing W-9 starts immediately, on the first reportable payment made without a TIN. The rate is 24%. IRS Publication 1281 (Rev. 12-2023) says it applies to all subject payments after December 31, 2017, and that a payer whose payee refuses or neglects to give a TIN should begin backup withholding at once.
Publication 1281 lists the payments that can be subject to it, including nonemployee compensation reported on Form 1099-NEC, rents and royalties on Form 1099-MISC, interest, dividends and broker proceeds. It also lists exclusions, such as real estate transactions, retirement account distributions, unemployment compensation and state or local tax refunds.
The dollar floor moved for 2026. The Instructions for Forms 1099-MISC and 1099-NEC (Rev. December 2026) say that for tax years beginning after 2025, the minimum threshold for reporting certain payments, or performing backup withholding on them, rose to $2,000. Publication 1281 (Rev. 12-2023) predates that change.
A TIN can be missing even when something is written in Part I. Publication 1281 treats a TIN as missing if it is not provided, is obviously incorrect, has more or fewer than nine digits, or mixes digits and letters. An entry like XX-XXX482 with a digit dropped is a missing TIN for withholding purposes, not a typo to sort out later.
"Applied For" buys time only for some payments. The Form W-9 (Rev. March 2024) says a payee who writes "Applied For" generally has 60 days to supply the TIN for interest, dividends and certain payments on readily tradable instruments. It says the 60-day rule does not apply to other payments, and Publication 1281 says nonemployee compensation is subject to backup withholding immediately even if the payee is awaiting a TIN.
The IRS backup withholding page names a second trigger, separate from TINs: the IRS can tell a payer to withhold because the payee underreported interest or dividend income.
How a firm collects the form in the first place, and keeps it current, is covered in W-9 collection.
Decision steps for one vendor payment
These steps are an example of how a firm might lay out the rules above for a client's bookkeeper. They describe what the IRS publications say and do not replace the client's own judgment.
- Is the payment a type subject to backup withholding? If no, such as a real estate transaction, which Publication 1281 lists among the excluded payments, do not withhold under this rule.
- Does a W-9 exempt payee code apply to this payment? If a valid code applies, do not withhold. If the code does not fit the payment, keep going.
- Is a TIN on file? If no, withhold 24%. "Applied For" does not delay withholding on nonemployee pay.
- Is the TIN in a valid format: nine digits, no letters? If no, treat it as missing and withhold 24%.
- Has the IRS sent a CP2100 or CP2100A notice listing this payee, and do your records agree with it? If no, do not withhold. If yes, follow the B-notice steps in the next section, and withhold if the payee does not respond in time.
Does backup withholding apply after a B-notice?
Backup withholding applies after a B-notice only if the payee does not respond in time. A B-notice is the backup withholding notice a payer sends a payee after the IRS reports an incorrect name and TIN combination on a CP2100 or CP2100A. The first B-notice asks for a signed W-9. The second asks for validation from the SSA or IRS.
IRS Publication 1281 sets the timelines:
- First B-notice. Send the notice, a Form W-9 and an optional reply envelope within 15 business days of the CP2100 date or the date you received it, whichever is later. Begin backup withholding if a signed W-9 has not come back within 30 business days. Stop within 30 calendar days of receiving the signed W-9.
- Second B-notice. Used when the same payee appears a second time within three calendar years. Do not include a W-9. An individual must send a copy of a Social Security card. For an EIN, the payee gets IRS Letter 147C and sends a copy to the payer. Begin withholding if validation has not arrived by the 30th business day.
- Undeliverable notice. Begin backup withholding and try to find a correct address.
Publication 1281 also covers a case firms ask about: if the first-notice W-9 comes back with the same name and TIN the IRS flagged, keep the W-9 on file to show the payee certified it, and do not backup withhold.
A B-notice only applies where the CP2100 listing agrees with the payer's records. Publication 1281 says that when the listing and your records disagree because of your own entry error, you correct your records and do not send a B-notice. The steps for checking a TIN that failed, before any notice arrives, are in what happens when a W-9 TIN fails matching.
How is backup withholding deposited and reported on Form 945?
Backup withholding is deposited as federal tax and reported once a year on Form 945, Annual Return of Withheld Federal Income Tax. The amount withheld from each payee also appears on that payee's 1099, in the federal income tax withheld box, which is Box 4 on Form 1099-NEC.
The Instructions for Form 945 (2025) say all federal income tax withheld from nonpayroll payments, including backup withholding, goes on one annual Form 945, and that backup withholding is entered on line 2. Wage withholding stays on Form 941 or 944. The same instructions say Form 945 deposits must not be combined with Form 941 or 944 deposits, that deposits are made electronically, and that no deposits are required during the year if total tax for the year is under $2,500.
The 2025 instructions give that year's due date as February 2, 2026, or February 10, 2026, for a filer that made all deposits on time and in full. Check the current year's instructions for the next return's dates.
On the payee side, the same December 2026 instructions for Forms 1099-MISC and 1099-NEC say Box 4 reports federal income tax withheld, including backup withholding on Box 1a payments when the TIN is missing. They also say to file Form 1099-NEC for each person subject to backup withholding regardless of the payment amount, so a vendor below the $2,000 threshold still gets a form if tax was withheld.
The withheld amount then has to reach the right line of the payee's own return. The posts on tax data entry automation and on scan and populate tax software look at how a Box 4 amount on a client's 1099 gets read rather than retyped.
Backup withholding exemptions claimed wrongly on the W-9
A backup withholding exemption claimed wrongly on a W-9 is an exempt payee code on line 4 that does not fit the payee or the payment. Accepting it means skipping withholding the payer may owe. The two common errors: a sole proprietor entering a code, and a corporation claiming exemption for a payment type where corporations are not exempt.
The Form W-9 (Rev. March 2024) says individuals, including sole proprietors, are generally not exempt from backup withholding. It says corporations are exempt for certain payments but not for payments made in settlement of payment card or third-party network transactions, not for attorneys' fees or gross proceeds paid to attorneys, and not for medical and health care payments reportable on Form 1099-MISC.
A business name is not proof either. IRS Publication 1281 says a payer cannot treat a payee as an exempt corporation just because its name contains "Company" or "Co.". It lists ways to establish corporate status, including a W-9 with an EIN and a statement from the payee that it is a domestic corporation, or a corporate resolution on file.
Read line 4 against line 3a every time. Code 5 with "Individual/sole proprietor" ticked, or any code on a W-9 from a law firm that is being paid legal fees, is a reason to ask again before relying on it.
Schema CPA reads returned W-9s and checks the TIN pattern, so a dropped digit shows up at intake; deciding whether an exemption fits remains the firm's call. When a vendor will not send a corrected form, the post on how to chase clients for documents covers follow-up wording, and the workflow overview shows where intake checks happen.