Understanding TPSOs & Reporting Thresholds
TPSO stands for Third-Party Settlement Organization, like payment processors, marketplaces, or apps that settle payments to individuals. Under the OBBB changes:
- Form 1099-K reporting is only required if a payee receives over $20,000 in gross payments and there are more than 200 transactions in a year. (irs.gov)
- If either threshold is not met, the TPSO is not required to report or issue backup withholding under §6050W/§3406 regulations. (irs.gov)
Backup Withholding Rules Simplified
When backup withholding may apply:
- The new proposed regulations clarify: backup withholding applies only after both thresholds are crossed—dollar amount and transaction count. (irs.gov)
- Before thresholds are met, TPSOs are not required to backup withhold, but payees should still report income on their tax return.
Actionable Steps for TPSOs & Payees
| For TPSOs (payment platforms) | For Payees (individuals, small businesses) |
|---|---|
| Track each payee’s cumulative number of transactions and gross payments. Once both exceed thresholds, issue Form 1099-K and begin backup withholding procedures under proposed regulations. | Keep detailed transaction histories. If you expect to exceed thresholds, ensure your TIN/EIN is correct and provide it proactively to avoid backup withholding errors. |
| Monitor proposed regulation publication, comment periods. ETS deadlines matter—proposed regulations are relevant for payments made in calendar years after December 31, 2024. (irs.gov) | Be aware that even if you don’t trigger thresholds, the income is taxable. Use deductions, FEIE, HSA, etc., to manage tax when filing annually. |
Common Pitfalls & Penalties to Avoid
- Missing the combination requirement: Remember both the dollar and transaction thresholds must be met. Reporting only one is insufficient. Platforms misapplying rules may issue incorrect Forms 1099-K or backup withhold incorrectly.
- Incorrect or missing TINs: If a payee fails to provide a valid TIN, and thresholds are exceeded, TPSOs may begin backup withholding. ﹘ Make sure forms and platform profiles are up to date. (irs.gov)
- Late or incomplete group exemption submissions: For nonprofits using group letters, failure to submit Supplemental Group Ruling Information (SGRI) on time or correctly may lead to loss of group exemption. Rev. Proc. 2026-8 sets strict timings and requirements. (irs.gov)
Timeline & Effective Dates
- Proposed backup withholding regulations apply for payments made in calendar years beginning after December 31, 2024. (irs.gov)
- Rev. Proc. 2026-8, the new group exemption rules, are already issued. Central orgs must meet certain transition period deadlines by January 22, 2027. (irs.gov)
Final Thoughts
To stay compliant:
- Zero in on precise thresholds and ensure both are triggered before reporting and backup withholding begin.
- Regularly reconcile payer/payee records and verify correct TIN/EIN information.
- For nonprofits, ensure internal governance aligns with group exemption requirements—authorize subordinate removals, establish reporting periods, and meet deadlines.
Category: Compliance Author: NomadicTax Research Team Read Time: 5 min