Depends on your situation
Inconvenient in the short term. But it can avoid larger penalties and ensure compliance in the long run.
The short answer
Not lost — advance tax
The 24% is an advance payment of federal income tax, credited on Form 1040 at filing.
Best to avoid it
Keep tax information updated and respond promptly to IRS notices.
Introduction
A 24% cut off the top — but not gone forever
The very idea of being notified that you are now subject to backup withholding would elicit frustration to many people. An upfront payment reduction of 24% certainly feels hefty. However, is backup withholding as bad as it is made out to be? Or can it serve some useful purpose?
01Why it exists
Why backup withholding exists
The backup withholding system is one of the methods the IRS utilizes to enforce tax compliance. Designed to ensure taxation is collected against income that may be earned but not reported.
Trigger 1
Incorrect or missing TIN
A taxpayer gives an incorrect or non-existent Taxpayer Identification Number.
Trigger 2
Form W-9 inaccuracies
Submission of Form W-9 alongside the TIN presents inaccuracies with the IRS records held.
Trigger 3
IRS underreporting notice
The IRS has informed a taxpayer of income underreporting, like interest or dividends.
Withholding rate
24%
As a way to prevent tax evasion, the IRS requires payers to withhold an upfront payment of 24% of payments and remit that portion to the IRS.
02Downside
Effects of backup withholding
To many individuals — especially freelancers, investors, or contractors — backup withholding is a cash-flow disruption. Reliance on timely payments becomes very difficult with an upfront 24% withholding as it greatly reduces the available funds for business.
For individuals not adequately prepared for such situations, budgeting becomes a challenge.
03Upside
The upside — it’s not lost money
The bright side is that backup withholding is not an additional tax. It is, in effect, an advance payment of federal income tax.
When you file a tax return, the withheld amount will be credited on your Form 1040. If you have overpaid, you will be refunded. It also helps taxpayers reduce the risk of underpayment penalties.
04Bottom line
Depends — but the fix is straightforward
Is backup withholding good or bad? It depends. While most people would find it inconvenient, in the long run, it can avoid larger penalties and ensure compliance.
The focus should be on not receiving it by keeping tax information updated and responding promptly to IRS notices.
Manage or eliminate backup withholding
Contact us for professional help managing backup withholding and protecting your income. Call (212) 641-0673 or send the contact form.
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“Plan early because if you don’t there might be a surprise. You just made a big purchase or you made a big sale. You don’t know how that will affect your taxes.”
George Dimov, CPA
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Stop the 24% cut
Fix the trigger and the withholding stops
Wrong TIN, W-9 mismatch, unresolved IRS notice — each has a specific fix. 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 freelancers, investors, and contractors on backup withholding and IRS notices. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.