Why is the IRS withholding 24% from my investment income? What is backup withholding?

Backup withholding is a 24% flat tax that brokerages, banks, and other payers are required to withhold from certain income when the IRS flags your account. It can come as a surprise if you've never encountered it before.

What triggers backup withholding?

Backup withholding is applied when:

• You didn't provide a Tax Identification Number (TIN) — Either a Social Security Number (SSN) or Employer Identification Number (EIN) — to the payer when opening an account
• Your TIN doesn't match IRS records — The name and TIN combination you gave doesn't match what the IRS has on file
• The IRS notified the payer that you underreported dividend or interest income in a prior year
• You failed to certify that you're not subject to backup withholding when filling out Form W-9

When any of these conditions exist, payers must withhold 24% from payments including dividends, interest, rents, and royalties reported on Form 1099.

What to do if it's happening to you:

• TIN mismatch ("B Notice"): You'll receive a notice from your broker (called a "B Notice"). You must respond by providing a correct, certified TIN on Form W-9 within 30 days or the withholding continues.
• Underreported income: If the IRS notified the payer because of underreported income on a prior return, you need to contact the IRS directly to resolve the underlying issue. Filing an amended return (Form 1040-X) for the year in question often resolves it.
• Wrong SSN at account opening: Simply submit a new W-9 with the correct information to your broker or bank.

Getting credit for amounts withheld:

Backup withholding is still your tax money — it gets credited toward your total tax liability for the year, just like regular withholding. The amount withheld appears in Box 4 of your 1099-INT or Box 4 of your 1099-DIV. Report it on Line 25b ("Other withholding") of Form 1040 to claim the credit.

It is not permanent: Once you resolve the underlying issue and your payer certifies the correction with the IRS, backup withholding stops.