Backup Withholding
Definition
A type of tax withholding applied at a flat 24% rate on certain payments (interest, dividends, non-employee compensation) when the payee has not provided a correct taxpayer identification number (TIN) or has been notified by the IRS to be subject to backup withholding. Payers are required to withhold and remit this amount to the IRS. The withheld amount is credited against your tax liability when you file your return, similar to regular withholding.
Example
You open a bank account but fail to provide your Social Security number. The bank withholds 24% of the $1,000 interest earned ($240) and sends it to the IRS. You claim the $240 as a credit on your tax return.