What is backup withholding? The 24% rule for payers

Backup withholding makes sure the IRS collects tax on income it otherwise could not match to a taxpayer. According to the IRS, payments that may be subject to it include interest, dividends, rents, royalties, nonemployee pay, broker and barter exchange transactions, and payment card and third-party network transactions. Real estate transactions are not subject to it (Form W-9; IRS, Backup withholding).

For an accounts payable team, the relevant payments are mostly contractor and service fees reported on Form 1099-NEC, and rents, royalties and other income reported on Form 1099-MISC.

The IRS gives the rate as 24% (IRS, Backup withholding). The Requester instructions for Form W-9 say a payer “must deduct, withhold, and deposit with IRS 24% of reportable payments” until the reason for withholding is fixed (Instructions for the Requester of Form W-9).

The IRS General Instructions for Certain Information Returns list the conditions. The ones that matter to most AP teams:

Payers can reduce mismatch notices by checking name and TIN combinations before filing. The IRS says payers that use its TIN Matching service receive fewer backup withholding (CP2100) notices and penalty notices.

1. 1

   IRS sends a CP2100 or CP2100A

   After you file 1099s, the IRS lists payees whose name and TIN combination does not match its records (or the SSA’s). Compare the list with your own records first.
2. 2

   First B notice

   Within 15 business days of the notice date (or the date you received it, if later), send the payee the first B notice, a Form W-9 and an optional reply envelope. If a corrected, signed W-9 is not back by the 30th business day, begin withholding.
3. 3

   Second B notice

   If the same account is flagged again within three years, send the second B notice. A W-9 is no longer enough: an individual must send a copy of a Social Security card, and an EIN holder must get IRS Letter 147C. Begin withholding if you do not have it by the 30th business day.
4. 4

   Stop when fixed

   Stop withholding no later than 30 days after you receive the required W-9 or validation.

Source: IRS Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s) (Rev. 12-2023). Generally, you do not have to send a B notice more than twice in three calendar years to the same account.

• Missing or wrong TIN: send the payer a completed, signed Form W-9 with the name and TIN exactly as the IRS or SSA has them.
• Second B notice: send a copy of your Social Security card or IRS Letter 147C (EIN). Letter 685C validates an ITIN.
• Underreported interest or dividends: the IRS page says to correct the reason you became subject to it, for example by filing missing returns or paying the tax owed. See IRS Publication 1335 for that case.
• Payer’s side: once the payer has what it needs, it must stop no later than 30 days after receiving it (Pub. 1281).

On the W-9 itself, item 2 of the Part II certification says you are not subject to backup withholding. If the IRS has told you that you are, the W-9 instructions say to cross out item 2 before signing (Form W-9).

• Form 945 reports federal income tax withheld from nonpayroll payments, including backup withholding (IRS, About Form 945). The EIN on your 1099s must match the EIN on Form 945.
• Form 1099: show the amount withheld on the payee’s 1099-NEC or 1099-MISC. If you backup withhold, you must file the 1099 and furnish a statement even if the payment is below the normal threshold (General Instructions, Part N).
• Due date: the 2025 Form 945 was due February 2, 2026, or February 10, 2026 if all deposits were made on time and in full (Instructions for Form 945). Check the current instructions for the 2026 return.
• Deposits: Form 945 deposits are separate from Form 941 payroll deposits. You do not file Form 945 for a year with no nonpayroll withholding.

The 1099 reporting threshold for 2026 payments is $2,000; see the 1099 threshold checker and the 1099 deadlines for 2026.

• W-9 requests: email a vendor a secure link to submit its W-9 details online, and see each vendor’s W-9 status (not requested, requested, received or expired).
• Encrypted tax IDs: tax IDs are encrypted at rest and shown masked to the last four digits.
• Approval warnings: approvers see when a 1099-eligible vendor has no W-9 on file, before the invoice is paid.
• Draft 1099 records: Aequo AP drafts 1099-NEC and 1099-MISC records for review. It does not e-file with the IRS or send copies to vendors, and paying vendors from Aequo is coming soon, so backup withholding is handled in your payment and payroll or accounting system.