You just received a CP2100 or CP2100A notice from the IRS—commonly called a B-notice—informing you that one or more of your contractors provided an incorrect Taxpayer Identification Number (TIN). Now you're required to start backup withholding on their payments, which means holding back 24% of every payment and sending it directly to the IRS.
Backup withholding onundefinedcontractors is mandatory when a payer receives official notice that a contractor's TIN is missing or incorrect, or when the contractor fails to certify their TIN after two B-notices. The current backup withholding rate is 24% of the gross payment (with limited exceptions), and these withheld funds must be deposited with the IRS using Formundefinedand reported on the contractor's Form 1099. Backup withholding continues until the contractor provides a valid, certified TIN or the IRS notifies you to stop.
Key Takeaways
- Backup withholding requires you to hold 24% of contractor payments and remit it to the IRS when a contractor's TIN is missing, incorrect, or uncertified after IRS notice.
- The obligation begins after you receive a CP2100 or CP2100A notice (B-notice) from the IRS and send two solicitation notices to the contractor without receiving a valid TIN certification.
- You must deposit backup withholding amounts using the Electronic Federal Tax Payment System (EFTPS), report them on Form 945, and include the withheld amount on the contractor's Form 1099-NEC or 1099-MISC.
- Failure to backup withhold when required can result in penalties equal to the amount you should have withheld, plus interest, making compliance essential.
- Backup withholding stops only when the contractor submits a valid Form W-9 with correct TIN certification or the IRS issues a stop-withholding notice.
What Is Backup Withholding and When Does It Apply?
Backup withholding is the IRS's enforcement mechanism to ensure tax compliance when independent contractors fail to provide—or provide incorrect—taxpayer identification information. Unlike regular tax withholding on employee wages, backup withholding applies to payments that would typically be reported on Form 1099-NEC (nonemployee compensation) or Form 1099-MISC (miscellaneous income).
The mechanism exists because the IRS cannot match income reports to taxpayer accounts when the TIN is missing or wrong. Backup withholding is the fallback: it ensures the tax gets collected even when the identification match fails. Formundefinedis where the withheld amounts are reported annually.
As of 2026, the backup withholding rate remains 24%, unchanged since the Tax Cuts and Jobs Act adjusted it from the previous 28% rate in 2018. This percentage applies to the gross payment amount before any deductions or expenses.
The Four Trigger Conditions for Backup Withholding
You must begin backup withholding onundefinedpayments when any of these conditions exist:
- B-notice response failure: You received a CP2100 or CP2100A notice from the IRS indicating TIN/name mismatch, you sent the required solicitation notices to the contractor, and the contractor did not provide a corrected, certified Form W-9 within the required timeframe.
- Missing TIN: The contractor fails to provide any TIN when you initially request a Form W-9, and payments begin without one on file.
- Notified underreporting: The IRS specifically notifies you that the payee is subject to backup withholding due to underreporting interest or dividend income (less common for contractor payments, more common for investment income).
- False certification: The contractor provided a TIN but falsely certified they are not subject to backup withholding when they actually are.
For most businesses dealing with contractors, the first scenario—receiving a B-notice—is by far the most common trigger.
Understanding the B-Notice Process
The CP2100 and CP2100A notices arrive annually, typically in late fall or early winter, after the IRS processes the previous year's information returns and identifies TIN/name mismatches. The notice will list specific payees whose information did not match IRS records.
Your Response Timeline and Required Actions
When you receive a B-notice, you cannot immediately start backup withholding. The IRS requires a specific solicitation process:
First B-notice: Withinundefinedbusiness days of receiving the notice, you must send the first solicitation to the contractor requesting a corrected, signed Form W-9. You should clearly state that the IRS has notified you of a TIN/name mismatch and that failure to respond will result in backup withholding.
Second solicitation: If the contractor does not respond to the first notice withinundefineddays, you must wait to receive a second B-notice for the same payee in a subsequent year. Upon receiving this second B-notice, you send a second solicitation immediately.
Backup withholding begins: If the contractor fails to provide a valid, certified W-9 withinundefinedbusiness days of your second solicitation, you must begin backup withholding on all reportable payments made after that point.
This process means backup withholding rarely starts in the same calendar year as the first B-notice—typically it begins the year after receiving a second consecutive notice for the same contractor.
What Counts as a Valid Response
A valid response that stops the backup withholding requirement must include:
- A completed Form W-9 with the correct legal name exactly as it appears on the contractor's tax return
- The correct TIN (Social Security Number or Employer Identification Number)
- The contractor's signature certifying, under penalty of perjury, that the information is correct and they are not subject to backup withholding
An email or verbal correction is not sufficient. The IRS requires the physical or electronic signed Form W-9.
How to Calculate and Apply the 24% Backup Withholding
Calculating backup withholding is straightforward, but the details matter for compliance.
The Basic Calculation
Backup withholding applies to the gross payment amount before any fees, commissions, or expense reimbursements are deducted. For a contractor receiving $5,000 for services:
- Gross payment: $5,000
- Backup withholding (24%): $1,200
- Net payment to contractor: $3,800
The contractor receives $3,800, and you are responsible for remitting the $1,200 to the IRS.
Important Exceptions and Special Cases
Expense reimbursements: If you reimburse a contractor for expenses they incurred on your behalf (and you have proper documentation), those reimbursements are generally not subject to backup withholding. Only the payment for services is withheld.
Real estate transactions: Backup withholding generally does not apply to real estate transactions reportable on Form 1099-S, even if the seller's TIN is incorrect.
Corporation exemption: Payments to corporations are typically exempt from backup withholding requirements, except for payments for medical and health care services, attorney fees, and certain other specified services. However, if you're unsure of the contractor's entity type, do not assume exemption—require a properly completed W-9.
Credit card and third-party network payments: If you pay a contractor exclusively through credit card or payment settlement entities (like PayPal for business transactions), backup withholding is typically not your responsibility—the payment processor handles reporting on Form 1099-K.
Applying Withholding Mid-Contract
If backup withholding becomes required partway through a contract term, you withhold only from payments made after the effective date. You cannot retroactively withhold from previous payments, though you'll need to report the situation accurately on year-end forms.
If a contractor's payment schedule is irregular or project-based, apply the 24% to each payment as it's made. Never "average out" the withholding or delay it to a final payment—the IRS expects withholding concurrent with each payment.
Depositing and Reporting Backup Withholding
Collecting the 24% is only half your responsibility. The IRS has strict requirements for when and how you must remit these funds.
Deposit Schedule and Form 945
Backup withholding amounts are deposited and reported separately from employee payroll taxes. You use Form 945, Annual Return of Withheld Federal Income Tax, specifically for backup withholding and other non-payroll withholding.
Your deposit schedule depends on the total backup withholding amount:
| Total Annual Backup Withholding | Deposit Schedule | Deadline | |--------------------------------|------------------|----------| | Less than $2,500 | Annually with Formundefined| Januaryundefinedof following year | | $2,500 or more | Monthly or semi-weekly (follows lookback rules) | Via EFTPS, due dates depend on payment date | | $100,000 or more in any deposit period | Next business day | Via EFTPS |
Most small businesses with limited backup withholding fall into the monthly deposit category, requiring deposits by the 15th of the following month.
All deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS). The IRS discontinued accepting checks for most withholding deposits in 2011.
Year-End Reporting Requirements
At year-end, you have three separate reporting obligations:
- Form 945: Due January 31, this annual return reports the total backup withholding you collected during the year and reconciles it with your deposits.
- Form 1099-NEC or 1099-MISC: Issue the appropriateundefinedform to the contractor by January 31, reporting both the gross payments in Boxundefined(or appropriate box) AND the backup withholding amount in Boxundefined(Federal income tax withheld).
- Form 1096: The transmittal form accompanying paper copies ofundefinedforms sent to the IRS (not required if filing electronically).
The contractor uses the amount reported in Boxundefinedas a credit against their tax liability when they file their personal tax return, just as employees use W-2 withholding.
Record Retention
Keep copies of all B-notices, solicitation letters, W-9 forms (or documentation of requests and non-responses), calculation worksheets, deposit confirmations, and filed returns for at least four years. The IRS can assess penalties for non-compliance going back three years in most cases, and having documentation is your only defense in an audit.
Common Mistakes and How to Avoid Them
From working with thousands of businesses navigating backup withholding compliance through our platform, we've identified several recurring mistakes that lead to penalties.
Starting Too Early or Too Late
Too early: Some businesses receive a first B-notice and immediately start withholding without following the required two-notice solicitation process. This creates accounting headaches and potentially violates the contractor's rights.
Too late: Others wait beyond the required timeframe after the second solicitation expires, exposing themselves to penalties for the period when they should have been withholding but weren't.
Keep a compliance calendar that tracks when each B-notice was received, when solicitations were sent (with proof of mailing), and when the withholding obligation begins.
Miscalculating the Withholding Base
A construction company paying a contractor $10,000, with $3,000 representing reimbursement for materials, should withhold 24% of $7,000 (services only), not the full $10,000—assuming they have proper documentation that the $3,000 represents actual expense reimbursement and not just a contract allocation.
Always separate true expense reimbursements (documented, specific, incurred on your behalf) from the service fee. If you cannot clearly document the separation, the IRS expects you to withhold on the full amount.
Treating Backup Withholding Like Payroll Withholding
While both involve remitting money to the IRS, backup withholding:
- Uses Form 945, not Form 941
- Does not include Social Security or Medicare components
- Has different deposit schedules
- Does not qualify for the payroll tax credit programs available to employers
Businesses that lump backup withholding into their payroll tax deposits create reconciliation nightmares and potential underpayment penalties.
Failing to Document the Solicitation Process
If the IRS questions why you started backup withholding—or why you didn't—your solicitation documentation is critical. Send solicitation notices via certified mail or with delivery confirmation, and save proof that you sent them on specific dates. Email can work if you have read receipts and the contractor has previously agreed to electronic delivery, but physical mail is safer.
When Backup Withholding Stops
Backup withholding is not permanent, but it doesn't stop automatically.
Contractor Submits Valid W-9
The most common way backup withholding ends is when the contractor provides a properly completed, signed Form W-9 with correct TIN information. Once you receive this:
- Verify the name/TIN combination matches by checking the format and completeness (though you cannot verify it against IRS records directly)
- Stop backup withholding immediately for subsequent payments
- Retain the W-9 for your records
- Continue reporting the contractor on Form 1099, but without further withholding
You cannot refund backup withholding you already collected and deposited. The contractor receives credit when they file their personal tax return.
IRS Issues a Stop-Withholding Notice
In some cases, the IRS will send you a specific notice instructing you to stop backup withholding on a particular contractor. This typically happens when:
- The IRS has resolved the TIN mismatch in its records
- The contractor has corrected their information directly with the IRS
- The IRS has determined withholding is no longer necessary
Always comply with these notices immediately and keep them in your records.
Entity Status Change
If a contractor incorporates (forming a C or S corporation) and provides a new W-9 showing the corporation as the payee with a corporate EIN, backup withholding generally stops because corporations are exempt from backup withholding for most service types.
However, verify the corporation is actually formed and the EIN is associated with it—accepting a contractor's statement without documentation exposes you to liability if they're misrepresenting their status.
Streamlining Backup Withholding Compliance
Managing backup withholding manually—tracking B-notices, scheduling solicitations, calculating 24% on each payment, making separate EFTPS deposits, and reconciling everything at year-end—creates significant administrative burden and error risk.
Collect1099 automates the entire backup withholding workflow alongside your regularundefinedcollection and filing. The system tracks which contractors have TIN issues, automatically generates compliant solicitation notices, flags when withholding should begin, calculates the 24% on each payment, and pre-fills Formundefinedwith your withholding data. For businesses paying dozens or hundreds of contractors, this automation eliminates the manual tracking that leads to costly mistakes.
Penalties for Non-Compliance
The IRS takes backup withholding seriously because it represents a significant revenue protection mechanism.
Failure to Withhold
If you should have been backup withholding but didn't, the IRS can assess a penalty equal to 100% of the amount you should have withheld, plus interest. This means if you should have withheld $12,000 over the course of a year but withheld nothing, you could owe the full $12,000 plus interest calculated from when you should have deposited it.
The IRS may also assess the Trust Fund Recovery Penalty against individuals responsible for compliance (typically business owners, CFOs, or controllers), making them personally liable for the amounts.
Failure to Deposit Timely
Late deposits of backup withholding carry the same penalty structure as payroll tax deposits:
- 2% if deposited 1-5 days late
- 5% if deposited 6-15 days late
- 10% if deposited more thanundefineddays late or withinundefineddays of receiving an IRS notice
- 15% if not deposited withinundefineddays of IRS notice or assessed
These percentages apply to the amount that was deposited late.
Incorrect Information Return Filing
Filing Formundefinedwith missing or incorrect backup withholding amounts is treated as an information return error, subject to penalties ranging from $60 to $310 per form (as of 2026), depending on how late the correction is filed. These penalties compound quickly across multiple contractors.
Special Situations and Edge Cases
Contractors Who Dispute the B-Notice
Sometimes a contractor insists their TIN is correct and the IRS notice is wrong. Your obligation doesn't change—if you received a B-notice and followed the proper solicitation process without receiving a certified W-9, you must withhold.
Advise the contractor to contact the IRS directly (they can call the business helpline at 800-829-4933 or work with their tax professional) to resolve the mismatch. They may need to file Form W-7 or SS-5 to obtain a corrected TIN, or they may need to update their name with the Social Security Administration after a legal name change.
You cannot stop withholding based on the contractor's assertion alone—you need either a properly certified W-9 or an IRS stop-withholding notice.
Mid-Year Contractor Transitions
If a sole proprietor contractor incorporates mid-year, treat the payments before and after incorporation as two separate payees for backup withholding purposes. If the sole proprietor was subject to backup withholding, continue withholding until you receive a valid W-9 from them. If they stop operating as a sole proprietor and you begin paying the new corporation, the corporation typically won't be subject to backup withholding (unless it's in an excepted category like medical/legal services and you receive a specific notice).
Issue two separateundefinedforms at year-end: one to the individual for payments before incorporation (showing backup withholding if applicable) and one to the corporation for payments after (ifundefinedreporting applies to that corporation at all).
State Backup Withholding
Several states have their own backup withholding requirements separate from federal obligations. California, for example, has a 7% backup withholding rate for specific situations involving contractors. Always check your state's requirements—federal compliance does not automatically mean state compliance. Your state's department of revenue website will have guidance on whether state backup withholding applies in your jurisdiction.
Preventive Measures: Stopping Problems Before They Start
The best backup withholding strategy is avoiding the need for it entirely.
Collect W-9s Before First Payment
Make submission of a completed, signed W-9 a contractual requirement before issuing any payment to a new contractor. This prevents the "missing TIN" trigger entirely and gives you documentation if questions arise later.
Verify W-9 Completeness
Check every W-9 for:
- Legal name filled in (matches the name that will appear on the contractor's tax return)
- Correct TIN format (9 digits for SSN/EIN, properly formatted)
- Entity type checked
- Address complete
- Signature and date present
Return incomplete W-9s immediately and don't process payments until you have a complete form.
Use TIN Matching Services
The IRS offers a TIN Matching program that allows authorized payers to verify name/TIN combinations before filing information returns. While this service has fees and registration requirements, for businesses with high contractor volumes, it can prevent B-notices before they occur.
Collect1099 integrates TIN validation in the W-9 collection workflow, flagging potential mismatches before you file, which dramatically reduces B-notice rates for our customers compared to manual collection methods. Preventing one backup withholding situation saves far more in administrative costs than the validation pricing costs.
Annual W-9 Re-Collection
Consider re-collecting W-9 forms every few years, especially from ongoing contractors. People change names (marriage, divorce, legal name changes), businesses change structure, and EINs occasionally change. Fresh information reduces mismatch risk.
Frequently Asked Questions
What is the backup withholding rate forundefinedcontractors in 2026?
The backup withholding rate is 24% of the gross payment amount for all reportable payments subject to backup withholding. This rate has been in effect sinceundefinedwhen the Tax Cuts and Jobs Act reduced it from the previous 28% rate. The 24% applies to the payment amount before any deductions, with limited exceptions for properly documented expense reimbursements.
Can I stop backup withholding as soon as a contractor gives me a corrected W-9?
Yes, you should stop backup withholding immediately for payments made after you receive a valid, signed Form W-9 with corrected TIN information from the contractor. However, you cannot refund amounts you already withheld and deposited—the contractor receives credit for those amounts when they file their personal tax return. You must continue reporting the contractor on Form 1099, but Boxundefinedwill only show amounts actually withheld, not amounts for payments after withholding stopped.
Do I need to backup withhold from all contractors or only those who received a B-notice?
You only backup withhold from contractors who meet one of the four trigger conditions: B-notice non-response after proper solicitation, complete failure to provide any TIN, IRS notification of underreporting, or false certification. If a contractor provided a complete Form W-9 with TIN before their first payment and you have not received an IRS notice about them specifically, you do not withhold. Backup withholding is targeted to specific compliance failures, not a blanket requirement for allundefinedcontractors.
What happens if I receive a B-notice but the contractor is no longer working for me?
You must still send the required solicitation notice to the contractor's last known address, documenting that you made the attempt. If you do not expect to make future payments to this contractor, you will not need to implement backup withholding since there are no payments to withhold from. However, if the contractor returns or you make any payment in the future before the issue is resolved, you must begin backup withholding at that time. Keep documentation of the solicitation attempt and the fact that the business relationship ended.
How do I deposit backup withholding amounts with the IRS?
Backup withholding deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS) at www.eftps.gov. You will need to enroll in EFTPS if you have not already done so for payroll taxes, using your Employer Identification Number. When making deposits, select "945" as the form type and follow the deposit schedule based on your total annual backup withholding amount: annually for under $2,500, monthly or semi-weekly for $2,500 or more, or next business day for $100,000 or more accumulated in any period.
Does backup withholding apply to payments made through PayPal or Venmo for business?
If you pay a contractor exclusively through payment card transactions or third-party payment networks like PayPal for business transactions, backup withholding is generally not your responsibility because the payment settlement entity reports these payments on Form 1099-K rather than you reporting on Form 1099-NEC. However, if you pay the same contractor through both direct payments (check, ACH, wire) and payment networks, you must backup withhold on the direct payments if the contractor is subject to backup withholding, even though the payment network portions are exempt.
Backup withholding adds complexity to contractor payment processes, but understanding the triggers, calculation methods, and deposit requirements protects you from substantial penalties while ensuring IRS compliance. The key is implementing systematic W-9 collection at the start of every contractor relationship, responding promptly and documentably to B-notices, and maintaining accurate records of your entire solicitation and withholding process. While the 24% rate creates immediate cash flow impacts for contractors, proper handling ensures those amounts are correctly credited when they file their returns, and your business avoids the far more costly penalties associated with failure to withhold when required.