24% missing at source
If 24 percent is missing from a payment that is not normally taxed at source, you are probably subject to backup withholding.
The quick diagnosis
Who gets the letter
If it is a tax ID problem, the IRS writes to whoever pays you and they write to you. If it is underreporting, the IRS writes to you.
Three triggers, three fixes
Three things can trigger it: a tax ID problem, an IRS underreporting finding, or failing to certify when you open an interest or dividend account. Each needs a different fix.
It comes back
The money is not lost. It is credited against your tax when you file.
Forward the letter you received.
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The setup
A 24 percent take at source — not a bracket, a fix
Backup withholding is the IRS taking 24 percent of certain payments at source, before the money reaches you. It applies to payments reported on a Form 1099, so interest, dividends, contractor income, rent, royalties, and broker proceeds, and it is triggered by a problem with your name or tax ID number, or your reporting history rather than by how much you earn.
It is not the same as the withholding on a paycheck. The backup withholding rate is fixed at 24 percent by statute (IRC section 3406) rather than set by your bracket, and it is a temporary enforcement measure that stops once you fix the underlying problem.
01How you find out
How you find out, and who tells you
A CP2100 or CP2100A goes to your payer, not to you.
The IRS writes to your payer.A CP2100 or CP2100A tells your bank, broker, or client that the name and tax ID you gave them does not match IRS records. You never see this notice.
Your payer writes to you.That letter is the B notice. A first B notice asks you for a corrected Form W-9. A second B notice, within three years, will not accept a W-9 and requires proof from the SSA or the IRS instead.
Or the payment simply arrives short.If you never gave a tax ID at all, withholding can begin without any notice at all, from the first payment.
So if you are waiting for an IRS letter to confirm you are subject to backup withholding, you are waiting for something that will not arrive. Check your payment statements instead, and check whether federal income tax has been withheld on a 1099 that would not normally show any.
How you find out
The IRS never sends you a CP2100
The notice goes to your payer. How each of the three triggers actually reaches you.
1 · Tax ID does not match (B program)
IRSCP2100Your payerB noticeYou
Fix: Fix: a corrected Form W-9 to the payer.
2 · Underreporting finding (C program)
IRSwrites to youYou
Fix: Fix: an IRS determination. A new W-9 does nothing here.
3 · No certification given
No notice sentWithholding just starts
Fix: Fix: a signed W-9 with the certification, if you can truthfully make it.
02Which trigger
Which trigger applies to you
All three leave you subject to backup withholding and look identical on a bank statement, but they are fixed in completely different ways.
| Trigger | What is wrong | Who the IRS contacts | The fix |
|---|---|---|---|
| B program (tax ID) | Name and number do not match, or none was supplied | Your payer | Corrected W-9 for a first B notice; SSA or IRS proof for a second |
| C program (underreporting) | IRS found underreported interest or dividends | You, directly | Resolve the underlying return; a W-9 will not fix it |
| Certification failure | Opened an interest or dividend account without certifying | No one; withholding just starts | Signed W-9 |
Knowing which trigger applies is the whole job, because sending the wrong fix wastes the weeks you needed.
03What it costs
What the 24 percent actually costs you
24%
Statutory rate (IRC 3406)
Not lost
Credited against your tax
Cash-flow hit
Money held for the year
Less than it feels like. Backup withholding is not a penalty and not an extra tax. It is a prepayment, and it is credited against what you owe when you file, in the same way as withholding from a paycheck. If too much was taken, the balance comes back as a refund.
What it actually costs you is the use of your money for the rest of the year, which for a contractor or a small business is a cash flow problem rather than a tax one. So fix it quickly rather than waiting for the filing to sort it out.
The amount withheld appears in the federal income tax withheld box of the 1099 you receive. Carry it onto your return. If you never file, you never get it back.
04How to stop it
How to stop backup withholding
The route depends on the trigger.
Certification failure:give the payer a signed W-9, provided you can truthfully make the certification that you are not subject to backup withholding for underreporting.
First B notice:return a signed, corrected W-9 to the payer with the right name and number combination within the window they give you.
Second B notice:a W-9 is not enough. You need a Social Security card copy from the SSA, or IRS Letter 147C confirming an EIN, sent to the payer.
C program:you need a determination from the IRS. You can get there by correcting the underreporting and paying what is due, by showing there was none, by disputing it, or by meeting the hardship test.
Withholding does not stop the moment you send the form. After a B notice, the payer has up to 30 calendar days from receiving valid documentation. Under the C program it stops on the date the IRS specifies, which is generally not immediate. Either way, expect the next payment or two still to arrive short.
05If you are the payer
If you are the one making the payments
A business that receives a CP2100 has obligations of its own, and they carry penalties. What you do depends on what is wrong:
Name and number match your records but not IRS records:send a B notice within fifteen business days, and start withholding only if the payee does not respond in time.
Number missing or obviously not a valid TIN:begin withholding immediately, with no B notice.
Deposit what you withhold on the federal schedule, because failing to withhold when required can leave you liable for the amount you should have taken.
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Send us the notice
Send us the notice
Forward the letter you received and we will tell you which program you are in, what it will take to stop it, and whether the withheld amount is recoverable. 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 individuals and businesses on tax compliance and IRS notices. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.