Overview
Under the OBBB, proposed regulations change when third-party settlement organizations are required to perform backup withholding on payments, including those reported on Form 1099-K. These changes may benefit gig economy workers, freelancers, and small sellers.
Key Changes
- The threshold for requiring payment platforms to perform backup withholding now generally requires that both of the following are met in a calendar year: payments exceed $20,000 and number of transactions exceed 200. (irs.gov)
- This replaces the prior rule under which the reporting threshold had been set at much lower amounts, causing many small-volume providers to be subject to complex reporting requirements. (irs.gov)
- These rules are proposed regulations, open to comments from stakeholders. Once finalized, they will dictate compliance requirements. (irs.gov)
Who Is Affected
- Individuals who receive income via payment platforms (e.g., ride-share, online sales, delivery services).
- Sellers with many small transactions may still cross both thresholds — even if the dollar total is modest, the transaction count matters. Conversely, someone with a few large payouts but fewer than 200 transactions may avoid backup withholding.
- Platforms must track both metrics: total annual payments to each payee and number of transactions, to determine when withholding kicks in. (irs.gov)
Examples
- Case A: Sam delivers for a ride-share app and earns $18,000 in 150 transactions in a year — no backup withholding required under proposed rule (doesn't meet both thresholds).
- Case B: Lee sells custom crafts online, does 250 orders totaling $18,000 — meets the transaction threshold but not the dollar threshold — still no backup withholding required.
- Case C: Mia has 300 transactions totaling $25,000 — hits both thresholds — backup withholding applies unless there’s valid taxpayer identification and documentation.
Actionable Advice
- Monitor your annual income and number of payment transactions through platforms. Use your accounting software or platform statements to track both.
- If you look like you’ll cross both thresholds, ensure your taxpayer identification number (TIN) is correct on file with platforms, or you risk backup withholding.
- Platforms should prepare their systems now to collect necessary data on both payment totals and counts.
- Stay alert for the final regulations — proposed rules may change based on public feedback. For now, this serves as guidance. (irs.gov)
Implications
- Lower reporting burdens for many gig workers who do many small transactions but not large dollar amounts.
- Simplifies tax compliance for individuals and platforms alike by restoring a threshold that was in place before the American Rescue Plan Act of 2021. (irs.gov)
- However, for those exceeding both thresholds, attention to paperwork, accurate reporting, and documentation is still critical.
Bottom line: If you're gig-working, freelancing, or selling online, this change may reduce your backup withholding exposure — but keep your transaction count and income in sight, and prepare if you seem likely to cross both thresholds.