Part II certification
Most individuals and sole proprietors are covered by the Part II certification. Leave the exempt payee code box blank.
The short answer
Exempt payee code
A separate route that covers whole categories including most corporations — though not for every payment.
Not exempt from tax
The income is still reportable and still taxable. Withholding decides when, not whether.
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Two boxes, two meanings
Two exempt boxes on Form W-9
“Exempt” means two different things on a Form W-9, in two different places. Most people only ever notice the second one, the exempt payee code box, and most people should leave it blank. Backup withholding takes 24 percent of a reportable payment and sends it straight to the IRS.
00The W-9 anatomy
The two exempt boxes on a Form W-9
Two boxes, two meanings. Neither exempts the income from tax.
Form W-9
Name
Business name
Federal tax classification
Exempt payee code
Address
City, state, ZIP
Taxpayer identification number
Certification, signed
B
Exempt by category
A status you have. Government bodies, tax exempt entities, banks, and most corporations.
Most individuals and sole proprietors leave this blank.
G
Not currently subject
A statement you make. True until the IRS tells your payer otherwise.
01Part II certification
The W-9 certification in Part II
Part II of the W-9 asks you to certify, under penalties of perjury, that your tax ID is correct and that you are not subject to backup withholding. For most individuals both are true, and they sign without much thought.
The certification is not permanent. If the IRS later tells your payer that your name and number do not match, or that you underreported interest or dividends, that certification is overtaken and withholding starts. Nothing needs to have changed on your side.
If you know you are currently subject to backup withholding for underreporting, you must strike that part of the certification. Signing it anyway is a false certification.
Backup withholding for underreporting stops when the underlying issue is resolved with the IRS and the IRS notifies your payer to stop. It does not lapse on its own, and the payer cannot end it for you.
02Exempt payees
Exempt payees, which is a different thing
Certain payees are exempt by category and enter a code on the form.
- The usual categories. Government bodies, tax exempt organizations, retirement accounts, banks and other financial institutions, registered brokers and dealers, and most corporations.
- It is payee-based rather than payment-based. The exemption follows what you are, and three kinds of payment override it.
- A separate box exists for FATCA. The FATCA reporting exemption code is a different question again and mostly applies to accounts held outside the US.
- Most LLCs are not exempt payees. An LLC taxed as a partnership, or a single-member LLC treated as disregarded, is not exempt. An LLC that has elected C or S corporation treatment generally is, and it enters the corporate code.
03Corporate exceptions
Where corporations are not exempt
This is the part that catches payers rather than payees. The business making the payment pays for getting it wrong.
Payment type
Attorney fees
Payments to a law firm are reportable and can be subject to backup withholding even where the firm is incorporated.
Payment type
Gross proceeds paid to an attorney
Settlement funds passing through a law firm's account are treated differently again.
Payment type
Medical and health care payments
Payments to incorporated medical providers remain reportable.
A business paying any of these cannot rely on the payee being a corporation. Getting a W-9 and reading the exempt payee code is the step that protects you, and failing to withhold when required leaves the payer liable for the amount.
Unsigned W-9
Not a valid W-9 — payer must withhold anyway.
False certification
Civil penalty of $500 on top of the perjury exposure.
Missing correct TIN
Penalty of $50.
04What exemption does not do
Exemption is a collection mechanism, not a tax exemption
What exemption removes
Only the 24% withholding. When money reaches the IRS changes — never whether it is owed.
What still happens
- •The income is still taxable
- •A 1099 still reaches the IRS
- •You still report and pay it on your return
For payments made after December 31, 2025, the 1099-NEC and 1099-MISC reporting threshold is $2,000, raised from $600. The $10 thresholds on interest and dividend reporting are unchanged.
It also does not apply to people who are not US persons at all. A nonresident alien files a Form W-8BEN instead, and faces 30 percent withholding unless a treaty reduces it.
Unsure which box is yours? Send us the form and the payment type and we will tell you which boxes apply.
05FAQ
Backup withholding exemption, four common questions
Am I exempt from backup withholding?
Usually yes, if your tax ID is correct and the IRS has not notified your payer otherwise. That is a certification you make, and it can stop being true.
Are corporations exempt from backup withholding?
Yes for most payments. Attorney fees, gross proceeds paid to an attorney, and medical and health care payments are the exceptions.
Does exempt from backup withholding mean I owe no tax?
No. Withholding decides when money reaches the IRS, never whether it is owed. The payer still files a 1099 either way.
What is a false backup withholding certification?
It is signing Part II when you know the IRS has you flagged for underreporting. The certification carries penalties of perjury, so strike that line rather than sign it.
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From the record
On addressing tax head-on, and on complicated multi-1099 returns
“Taxes are a topic that people avoid. But what I always recommend, address it head-on. Take a look at what can be done.”
George Dimov, CPA
“As a medical professional, my taxes were even more complicated because of the assortment of 1099s that I received through the different employers that I worked. I tried doing my taxes by myself on TurboTax and it showed that I owed over $24,000! I was shocked because I know several of my employers had withheld quite a bit.”
Mehvish Elahi
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Check your W-9 before you sign it
Check your W-9 before you sign it
Send us the form and tell us what the payment is for. We will tell you which boxes apply to you, or whether you should be withholding as the payer. Call (212) 641-0673 or send the contact form. No charge for the conversation.
Reviewed by George Dimov, CPA, New York, NY. Serving clients in all 50 states, 15+ years advising New York businesses and individuals. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.