IRS Proposes Backup Withholding Rules for Third-Party Reporting
Relaxed Backup Withholding Rules for Form 1099-K Payment Thresholds
Before H.R. 1, the One Big Beautiful Bill Act (OBBBA), was passed last year, the law on the books required third-party payment networks to issue Form 1099-Ks to merchants or businesses that received gross payments exceeding $600 for goods or services, regardless of the number of transactions. Settlement networks include intermediaries such as online marketplaces, payment apps and gig platforms. Because of outcry from merchants, that rule had been delayed since 2022.
The OBBBA repealed that rule and increased the filing threshold back to $20,000 in gross receipts and more than 200 separate transactions a year, retroactive to 2022. Now, the IRS has issued proposed regulations that align the backup withholding rules for reportable payments with the new OBBBA reporting requirements.
OBBBA Limited Backup Withholding
Backup withholding rules apply when a payee fails to give the payor their taxpayer identification number. Before OBBBA, backup withholding was required even if the minimum thresholds were not exceeded. The new regulations clarify that third-party settlement organizations are not required to backup withhold on payments settled through third-party payment networks unless reportable payment transactions for the year exceed $20,000 and transactions exceed 200. In other words, both thresholds must be exceeded for backup withholding to kick in.
How Backup Withholding Works
The proposed regulations explain that backup withholding will not be required until a payee reaches both the transaction and dollar thresholds. The amount subject to withholding is the amount of any transaction that exceeds either threshold at the time of payment, whichever one occurs later, and also includes the amount of any subsequent transactions during the calendar year. Also, if a payee was subject to backup withholding in the previous year, the payor must withhold in the subsequent year even if the thresholds are not met.
IRS Examples:
Example 1: Platform A is a third-party payor and Y is a participating payee. Y does not provide a taxpayer identification number to A. During calendar year 2026, A makes 201 payments that total $20,000.01 to Y. A must backup withhold on the entire amount of the 201st transaction because that transaction caused Y to exceed the de minimis reporting threshold of 200 transactions and $20,000 in gross payments.
Example 2: The facts are the same as in Example 1. During calendar year 2027, A makes 199 payments in settlement of third-party network transactions that total $18,000. A must backup withhold on each payment made to Y during 2027 because one or more payments made by A to Y during the preceding calendar year (2026) were reportable payments.
It should be noted that backup withholding and reporting thresholds do not affect whether income is taxable.
Public Comments
Treasury and IRS are seeking comments on the proposed regulations from interested parties. Those comments can be found on regulations.gov and will be considered by the IRS when it finalizes the regulations.
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