Glossary
Backup Withholding
Backup withholding is the 24% of a reportable payment that a US payer must hold back and pay to the IRS when the payee has not provided a correct taxpayer identification number, or after the IRS flags the payee’s name and number as not matching.
Also called: BWH, 24% backup withholding, B notice withholding, CP2100 withholding, federal income tax withheld
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Definition
Most payments a business makes to a contractor go out in full. The contractor reports the income and pays the tax later, on their own return. Backup withholding is the exception, and it shifts the job onto the payer.
The IRS describes it this way on its backup withholding page: “There are situations when the payer is required to withhold at the current rate of 24 percent.” The 24% is taken from future payments, so the IRS receives the tax up front instead of waiting for a return that may never mention the income.
The trigger that matters for most small businesses is a taxpayer identification number (TIN) problem. Either the payee never gave one, or the one on file does not match the payee’s name in IRS or Social Security Administration records. Backup withholding can also apply for underreported interest and dividends, but that case belongs to banks and brokers, not to a business paying contractors.
The money withheld is not a penalty and not the payer’s expense. It is the payee’s income tax, collected early. The payer holds it briefly, deposits it, and reports it. And a payer that does not collect it as required, Publication 1281 warns, “may become liable for any uncollected amount.”
Key points
- +The rate is 24% of the reportable payment.
- +It applies when a payee has not furnished a TIN, or after an IRS CP2100 or CP2100A notice flags a name and TIN mismatch.
- +For a missing TIN, Publication 1281 says to begin withholding if the payee does not provide one when first asked.
- +After a CP2100 notice, the payer has 15 business days to send a B notice and must start withholding no later than 30 business days after receiving the CP2100.
- +For tax years beginning after 2025, the threshold for reporting certain payments and performing backup withholding on them increased to $2,000.
- +Withheld amounts are reported on Form 945, not Form 941, and in box 4 of the payee’s Form 1099.
- +Withholding stops within 30 calendar days of receiving the payee’s signed Form W-9, or the required TIN validation after a second notice.
The two triggers: a missing TIN, or a name that does not match it
A TIN is missing when it was never provided, or when it is obviously wrong. Publication 1281 treats a number with more or fewer than nine digits, or with a letter in it, as missing rather than incorrect. For a missing TIN, the rule is immediate: if the payee does not provide a TIN when you first ask for it, you must begin backup withholding, and you continue until a TIN arrives.
An incorrect TIN is one in the right format whose name and number combination does not match IRS or Social Security Administration records. You usually learn about it after filing, when the IRS sends a CP2100 or CP2100A notice listing the mismatched returns.
That notice starts a clock. Publication 1281 gives the payer 15 business days from the notice date, or the date you received it if later, to send the payee a first B notice with a blank Form W-9. If the payee does not return a signed W-9, withholding must start no later than 30 business days after the notice. You may start as early as the day after you receive it.
A second notice for the same account within three calendar years is stricter. The payee then has to get the number validated by the Social Security Administration or the IRS, and a fresh W-9 is no longer enough.
Which payments it applies to, and the $2,000 threshold
The IRS lists most payments reported on Form 1099 as subject to backup withholding. For a business paying contractors, the important ones are commissions, fees and other payments for work done as an independent contractor, reported on Form 1099-NEC. Rents and other income on Form 1099-MISC, and payment card and third-party network transactions on Form 1099-K, are on the same list.
The threshold moved for 2026. The IRS instructions for Forms 1099-MISC and 1099-NEC say that for tax years beginning after 2025, the minimum threshold for reporting certain payments on information returns and performing backup withholding on those payments increased to $2,000, and may be adjusted for inflation.
One reporting rule cuts the other way. The same instructions say you must file Form 1099-MISC for each person from whom you have withheld any federal income tax under the backup withholding rules “regardless of the amount of the payment.” Once you withhold, the form is required even if the total is small.
Paying it over: Form 945 and box 4
Backup withholding has its own annual return. Publication 1281 says to report it on Form 945, Annual Return of Withheld Federal Income Tax. Form 945 is for nonpayroll withholding, and its instructions say not to report federal income tax withholding from wages on it. Wage withholding stays on Form 941.
The deposits stay separate too. The Form 945 instructions say not to combine Form 945 deposits with Form 941 deposits, or to combine the two when deciding whether the $2,500 threshold applies or which deposit schedule you follow. If the year’s Form 945 total is under $2,500, you do not have to make deposits during the year and can pay with the return.
On the payee’s side, the withheld amount goes in box 4, Federal income tax withheld, on Form 1099-NEC, 1099-MISC or 1099-K. The payment box still shows the full amount earned, including the part you held back. The Form 945 filer’s EIN must match the EIN on the 1099s that carry the withholding.
Backup withholding on Stripe Connect
On a Stripe Connect platform that pays contractors, the platform is the payer, so backup withholding is the platform’s obligation. Stripe’s tax tooling records a withheld amount rather than creating one. Its tax form import includes a federal_income_tax_withheld field, described as “The total amount withheld from federal income taxes, if any,” plus a delta field for adding to a total already in Stripe.
So the calculation happens before the transfer. A contractor earns $4,000 in a month with no TIN on file. The platform transfers $3,040 and keeps $960 to deposit with the IRS.
Two Stripe details follow from that. Because Stripe builds 1099 totals from what moved through Stripe, the form needs the withheld amount added back to the payment box and entered in box 4. And Stripe says it supports e-filing in all states but “won’t transmit forms to states on your behalf that have backup or state withholding amounts.” Plan to file those state forms yourself.
What a synced QuickBooks file shows when you withhold
Acodei syncs Stripe Connect transfers through Balance Transaction Mapping. You create a product for Stripe Connect, usually linked to an expense or cost of goods sold account, and map Transfer (Stripe Connect) to it on the Account Mapping page. Acodei then processes Connect activity on the daily balance summary or upon payout, depending on your settings.
Acodei sends aggregated transfer information, so QuickBooks shows the total transferred, not which contractor received each transfer. When you withhold, that total is the amount you sent, the $3,040 in the example above, not the $4,000 the contractor earned. The $960 never moved through Stripe, so record it yourself: a journal entry that debits the same contractor expense account and credits a backup withholding payable liability, then a payment from your bank that clears the liability when you deposit it with the IRS.
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Frequently asked questions
What is the backup withholding rate?
Twenty-four percent. The IRS describes it as “the current rate of 24 percent,” taken from reportable payments to a payee who has not provided a correct taxpayer identification number, or who is subject to withholding after an IRS notice. The rate applies to the payment itself, not to the payee’s profit.
When do I have to start backup withholding?
For a missing TIN, as soon as the payee fails to provide one when you first ask. For an incorrect TIN flagged on a CP2100 or CP2100A notice, send a B notice within 15 business days, and start withholding no later than 30 business days after receiving the notice if the payee does not return a signed Form W-9.
When can I stop backup withholding?
Publication 1281 says to stop no later than 30 calendar days after you receive the payee’s signed Form W-9, or, after a second notice for the same account, the TIN validation from the Social Security Administration or the IRS. You may stop at any point within that 30-day window.
Do I report backup withholding on Form 941?
No. Backup withholding goes on Form 945, Annual Return of Withheld Federal Income Tax, which is for withholding outside payroll. The Form 945 instructions say not to combine its deposits with Form 941 deposits. If the year’s total is under $2,500, you can pay with the return instead of depositing during the year.
Does Stripe withhold backup withholding for Connect platforms?
Stripe’s tax tooling records a withheld amount that you supply, through the federal_income_tax_withheld field on its tax form import. Calculating the 24%, holding it back from the transfer and depositing it with the IRS fall to the platform as the payer. Stripe also will not transmit state forms that carry backup withholding.
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Related reading
- Stripe Connect backup withholding in QuickBooks
- Form 1099-NEC
- Stripe Connect 1099-NEC forms and your QuickBooks books
- Stripe Connected Account
- Why the Stripe 1099-K and QuickBooks never match
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