How to Remit Backup Withholding on Contractor Payments
Learn when backup withholding applies to contractor payments, how to calculate 24%, and exactly how to deposit and report it to the IRS.
1What Triggers Backup Withholding on a Contractor Payment
Backup withholding kicks in when a contractor fails to provide a valid Taxpayer Identification Number (TIN), provides a TIN that the IRS has flagged as incorrect, or certifies on their W-9 that they are not subject to backup withholding when in fact they are. It can also be triggered if the IRS sends you a CP2100 or CP2100A notice stating that the name and TIN on a 1099 you filed do not match IRS records. Once any of these conditions exist, you are legally required to withhold — not just permitted to.
2The Withholding Rate and How to Calculate It
The current backup withholding rate is 24% of the gross payment made to the contractor. This applies to the full payment amount, not just the portion above the $600 reporting threshold. For example, if you pay a contractor $1,500 and backup withholding applies, you withhold $360 and remit only $1,140 to the contractor. Keep a clear record of every withheld amount, because you will need it when you file Form 945 at year-end.
3How to Deposit Backup Withholding with the IRS
Backup withholding is deposited through the Electronic Federal Tax Payment System (EFTPS), the same system used for payroll tax deposits. The deposit schedule — either monthly or semi-weekly — depends on your total annual liability. If your total backup withholding liability for the year is $2,500 or less, you can pay it in full when you file Form 945 instead of making periodic deposits. Always initiate deposits at least one business day before the due date to avoid late-payment penalties.
4Reporting Backup Withholding on Form 945
All backup withholding you remit during the calendar year must be reported on Form 945, Annual Return of Withheld Federal Income Tax. This form is due January 31 of the following year, though the deadline extends to February 10 if you made all required deposits in full and on time. On the 1099-NEC you issue to the contractor, report the withheld amount in Box 4 so the contractor can claim a credit for it on their own tax return. Filing a 1099-NEC without Box 4 populated when withholding occurred is a common and costly mistake.
5Stopping Backup Withholding Once It Starts
Withholding does not continue indefinitely. If you started withholding because a contractor had no TIN on file, you must stop as soon as they provide a certified W-9 with a valid TIN. If you were notified by the IRS via a B-notice (CP2100) that a TIN is incorrect, the process is more involved: you must send the contractor a specific IRS-prescribed solicitation letter and give them 30 business days to respond with a corrected W-9 before you stop withholding. Using a tool like W-9 Nudge to send automated reminders and collect updated W-9s can significantly shorten this resolution window.
6Common Mistakes That Create Withholding Liability
The most frequent error is paying contractors for months — or even years — before requesting a W-9, then scrambling when the IRS flags a TIN mismatch. At that point, withholding should have already begun. A second common mistake is treating backup withholding as optional once triggered; it is a mandatory federal requirement, and failure to withhold exposes your business to the same penalty as the unpaid tax itself. Collecting a completed, signed W-9 before the first payment is the cleanest way to eliminate this risk entirely.
7Record-Keeping Requirements for Withheld Amounts
The IRS expects you to retain records of every backup withholding transaction for at least four years from the date the tax was due or paid, whichever is later. Your records should include the contractor's name, TIN, each payment date and amount, the calculated withholding, EFTPS deposit confirmations, and copies of any IRS notices that triggered withholding. Storing these alongside the contractor's W-9 in a centralized system — rather than across email threads and spreadsheets — makes any future IRS inquiry far easier to resolve.
Ready to collect W‑9s without chasing contractors?
Send secure upload links, see who’s still outstanding, and automate reminders — so every W‑9 is in before 1099 season.
5 free requests · No credit card required
More from the blog
W‑9 collection guides
Disclaimer: This post is for general informational purposes only. W‑9 Nudge does not provide tax, legal, or accounting advice. Consult a qualified professional for guidance specific to your situation.