Backup withholding is income subject to additional withholding as required by the I.R.S. Banks and other institutions that pay you interest must file Form 1099. Some of the payments that may be subjected to backup withholding are dividends, rents and payments for work performed as an independent contractor. Banks or businesses may backup withhold payments when the taxpayer provided the payer with an incorrect tax payer number, or failed to provide one, or when the I.R.S. notifies the payer to begin withholding payments.