Compliance
Compliance Alert: Backup Withholding Changes That Impact Payment App Users
The recent proposed regulations significantly raise the threshold for backup withholding under OBBB—what app-based earners and platforms must know now.
By NomadicTax Research Team • 5-8 min read • February 26, 2026
## What the Backup Withholding Rule Alters Under the OBBB Proposal
Under proposed regulations (IR-2026-03) introduced January 2026, the One, Big, Beautiful Bill changes require backup withholding from third-party settlement organizations (TPSOs) **only if both**:
- The **total payments** to a payee through the TPSO exceed **$20,000**, and
- The **number of transactions** with the payee exceeds **200** for the calendar year. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-reflecting-changes-from-the-one-big-beautiful-bill-to-the-threshold-for-backup-withholding-on-certain-payments-made-through-third-parties?utm_source=openai))
This replaces the previously lower $600 threshold under prior law (as enacted by the American Rescue Plan Act), marking a substantial gap. Under the proposed rules, many small-scale gig workers and individual sellers may no longer face automatic backup withholding due to lower volume or value. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-reflecting-changes-from-the-one-big-beautiful-bill-to-the-threshold-for-backup-withholding-on-certain-payments-made-through-third-parties?utm_source=openai))
## Who This Affects and Why It Matters
- **Freelancers and gig workers** using platforms like Etsy, TaskRabbit, or payment apps: smaller income streams or few transactions might now dodge withholding.
- **Payment platforms (TPSOs)**: they must now track TWO thresholds (dollar amount and transaction count) rather than only one.
- **Tax preparers**: need to advise clients correctly—just because you receive a Form 1099-K doesn’t mean backup withholding applies under new rules.
## Compliance Steps for Individuals and Businesses
- **Monitor both your transaction count and total dollar volume** within each TPSO platform.
- If unsure whether you meet both thresholds, **plan for withholding just in case**, or consider voluntary estimated tax payments to avoid surprises at filing.
- **Maintain records**: TPSOs should provide statements; individuals should save transaction detail exports to prove whether thresholds were met.
- **Form 1099-K impacts**: Reporting follows the law but doesn’t by itself force withholding. Income is still taxable regardless of whether backup withholding is applied. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-reflecting-changes-from-the-one-big-beautiful-bill-to-the-threshold-for-backup-withholding-on-certain-payments-made-through-third-parties?utm_source=openai))
## Example Situations
**Scenario 1 – small seller**
- Earns **$18,000** total across 150 sales via a crafts marketplace in 2026. Under proposed regs, no backup withholding since neither criterion (>$20,000 or >200 transactions) is met.
**Scenario 2 – medium seller**
- Has **250 sales**, total $18,500 income. Even though transaction count criterion is met (>200), the dollar amount is below $20,000 – still no withholding.
**Scenario 3 – higher volume/value**
- 300 transactions amounting to $22,000 total in TPSO payments—both criteria met, backup withholding applicable to ALL payments once thresholds exceeded.
## Actionable Advice for Filing Season 2026
- If thresholds are exceeded, ensure correct withholding is implemented by the TPSOs—follow up with platforms for accurate reporting.
- Use Tools and Resources:
* IRS Fact Sheet for Form-1099-K changes. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
* IRS online account to track Forms received.
- Consult with tax professional if you expect to cross thresholds or have multiple platforms that aggregate TPSO incomes.
**Bottom Line:** The backup withholding changes under OBBB shift the thresholds significantly upward. For many small or occasional sellers, this reduces withholding burdens—but tax liability remains. Understanding both criteria avoids surprises and keeps you compliant.