What’s Changing with Backup Withholding
Under the One, Big, Beautiful Bill, the thresholds triggering backup withholding of payments made through third-party settlement organizations have been adjusted. Proposed regulations (Treasury/IRS IR-2026-03) would replace the old flat $600 trigger with a dual threshold requirement: both over $20,000 in payments and more than 200 transactions in a calendar year.(irs.gov)
This affects platforms like payment apps, gig economy platforms, online marketplaces, peer-to-peer services, etc.(irs.gov)
Who’s Affected and How
- Third-party settlement organizations (TPSOs) are required to track both the number of transactions and total amount per payee. Withholding would only be required when both thresholds are exceeded.(irs.gov)
- Sellers or individual service providers receiving payments via such platforms: if you don’t hit BOTH thresholds, no backup withholding applies under the new rule (pending final regulations).
- Platforms need compliance systems to monitor thresholds and flag payees who cross them.
What to Do Now to Stay Compliant
- Track transaction counts and payment totals for each platform—invoices, payments, fees—monthly or quarterly.
- For platforms: configure or upgrade systems to consolidate a payee’s total number and dollar value of transactions.
- Watch for IRS publication of final regulations. Until then, use proposed regs as guidance and avoid retroactive surprises.
Example Scenarios
- Case A: A food delivery driver receives 150 payments total amounting to $18,000 in a year. Under the new rule (once effective), no backup withholding, because though amount is close, transaction count is below threshold.
- Case B: A crafts seller gets 250 payments, totaling $15,000. Even though they exceed transaction count, they’re below $20,000 in amount—so no withholding.
- Case C: Same flower business, 300 transactions, $25,000 total—they meet both, so backup withholding may apply.
Pitfalls & Strategy
-Penalties may apply if platforms fail to withhold when required.
- Form 1099-K threshold is related but different—everyone who surpasses both amount and transaction thresholds will also receive a 1099-K.
- Monitor income sources—if similar payment flows occur across different platforms, combine counts and amounts as per the regs.
Take-away Tips
- Keep detailed records now—even before final regulations—to understand where thresholds might hit.
- Seek advice if your operations are near both thresholds, especially if you expect higher volume in upcoming years.