Backup withholding rules: the 24% rate, triggers, and exemptions

Who this page is for

This reference is for payers and the accounting or bookkeeping firms that support them. It covers the withholding rate, the payer-side trigger conditions, the purpose of exempt-payee codes, and the reporting mechanics after tax has been withheld.

When an IRS notice is involved, the notice procedures belong to a separate workflow. This page provides only the governing trigger and the high-level resolution path.

The backup withholding rate

The current backup withholding rate is 24 percent for reportable payments subject to backup withholding (IRS Backup Withholding).

The IRS C-program page applies the same 24 percent rate when the IRS directs a payer under Internal Revenue Code section 3406(a)(1)(C) to withhold from future interest and dividend payments (IRS Backup Withholding C Program).

The Instructions for the Requester of Form W-9 also state that the backup withholding rate is 24 percent and direct the payer to deduct, withhold, and deposit that amount while the cause remains unresolved (IRS Instructions for the Requester of Form W-9).

When a payer must withhold

The IRS backup withholding overview groups the rules into two programs:

• The B program applies when a payee fails to provide a correct TIN for the required information return.
• The C program applies when a payee fails to report or underreports interest or dividend income, or fails to certify that the payee is not subject to backup withholding for that underreporting (IRS Backup Withholding).

For the payer-side Form W-9 workflow, the Instructions for the Requester of Form W-9 enumerate four conditions:

1. The payee fails to furnish a TIN.
2. The IRS notifies the payer that the payee’s TIN is incorrect.
3. The IRS notifies the payer of payee underreporting of interest or dividend payments.
4. The payee fails to certify that the payee is not subject to backup withholding (IRS Instructions for the Requester of Form W-9).

The C program specifically operates under section 3406(a)(1)(C). When the IRS determines that an interest or dividend underreporting problem remains unresolved, it notifies payers to deduct 24 percent from future interest and dividend payments (IRS Backup Withholding C Program).

The 2026 threshold alignment

The 2026 change applies to the backup-withholding treatment of payments described in sections 6041 and 6041A. It does not replace the separate rules governing every other category of payment.

Public Law 119-21, section 70433(d)(1), amended section 3406(b)(6)(A) so that its former $600 amount now cross-references the dollar amount in effect for the calendar year under section 6041(a). The amendment applies to payments made after December 31, 2025 (Public Law 119-21).

The proposed regulations explain that these payments were previously treated as reportable payments for backup withholding when annual payments reached $600. For 2026 payments, the cross-referenced section 6041(a) amount is $2,000, with inflation adjustment beginning after 2026 (Proposed Regulations, 91 FR 20599).

Payments made in 2025 remain subject to the pre-change framework. Separate payment categories continue to follow their own backup-withholding rules.

What exempt-payee codes govern

Form W-9 line 4 allows an eligible payee to claim exemption from backup withholding. The requester instructions identify the eligible categories and allow the requester to rely on the claim unless the requester has actual knowledge that the exemption or classification is invalid or inconsistent (IRS Instructions for the Requester of Form W-9).

A corporation is one of the listed exempt-payee categories, but the corporate exemption does not apply to every payment. The requester instructions state that the following payments to a corporation are not exempt from backup withholding:

• medical and health care payments
• attorneys’ fees, including gross proceeds paid to an attorney
• payments for services made by a federal executive agency

The instructions also state that, for payment-card and third-party-network settlement payments, only the first four listed exempt-payee categories qualify. A corporation does not receive the corporate exemption for those settlement payments (IRS Instructions for the Requester of Form W-9).

An exempt-payee code addresses backup withholding status. Information-return reportability remains a separate analysis based on the payment, payment method, payment year, and certified federal tax classification. The who-gets-a-1099 guide covers that analysis.

The payer’s reporting mechanics

Report backup withholding in box 4 of the applicable information return. Forms 1099-MISC and 1099-NEC must be filed when backup withholding was applied, even when the payment is below the amount that would normally require an information return (IRS Instructions for Forms 1099-MISC and 1099-NEC).

Report the annual backup withholding liability on Form 945, Annual Return of Withheld Federal Income Tax. The filer EIN used on the information returns must match the EIN used for Form 945. Deposit timing and the remaining Form 945 filing requirements follow the separate Form 945 instructions (IRS General Instructions for Certain Information Returns).

Maintain the W-9, request history, withholding records, information returns, and Form 945 records within the firm’s controlled review workflow.

How backup withholding stops

The required correction depends on the reason withholding began.

For a TIN-related problem, the IRS overview states that correction can include providing the correct TIN to the payer (IRS Backup Withholding).

For interest or dividend underreporting, the payee must resolve the issue with the IRS. Under the C program, the payer stops withholding when the IRS notifies the payer that the taxpayer is no longer liable (IRS Backup Withholding C Program).

When an IRS incorrect-TIN notice or underreporting notice is involved, follow the applicable notice procedures. Those procedures are covered separately.

Triggers at a glance