What’s Changed with the Backup Withholding Rule
The IRS and Treasury have issued proposed regulations updating the threshold under which third-party settlement organizations (TPSOs)—think payment apps and online marketplaces—must perform backup withholding. This follows changes under the One, Big, Beautiful Bill (OBBB). (irs.gov) Previously, smaller totals could trigger withholding; now, only when both conditions are met:
- Gross payments to a payee exceed $20,000 in a calendar year, and
- The number of reportable transactions exceeds 200 in that year. (irs.gov)
That restores a pre-2021 threshold, replacing lower mandated reporting amounts. TPSOs must track both payments and transaction count to avoid unnecessary withholding. (irs.gov)
Why It Matters: Who Should Care
| Stakeholder | Impacts to Watch | Strategic Moves |
|---|---|---|
| Sellers / Gig Workers / Small Business Owners | Could mean fewer surprises with withheld payments if your total activity or transaction count stays below both limits. | Monitor volumes: count of payments and total dollars. Use on-platform reporting features. Negotiate payouts accordingly. |
| Payment Platforms / Marketplaces | Required to update their systems to track both metrics per payee, issue W-9s, apply withholding only when thresholds met. | Implement backend changes. Ensure payees know thresholds. Provide clear dashboards. |
| Tax Professionals | Need to advise clients accurately: many will expect changes but get caught off guard if they misinterpret thresholds. | Update contract templates, guidance to clients. Review clients’ payment histories. |
Proposed vs. Final Regulations: What’s Next
- These rules are proposed (REG-112829-25) and open for public comment. Deadline was March 10, 2026. (irs.gov) That means not yet law, but likely to become so, maybe with tweaks.
- TPSOs should prepare internal policy changes, but keep billing and withholding policies flexible.
- Final regulations could alter definitions—e.g., what counts as a “reportable payment” or how to measure transaction count.
Practical Example: Bite-Size Scenario
Ella, runs an online craft store selling handmade goods via a marketplace. In 2025, she had 180 transactions adding up to $25,000. Under the new proposed thresholds, no backup withholding occurs—because although gross payments exceed $20,000, transaction count (180) is below 200.
In contrast, Carlos, who made 220 sales totaling $18,000, would not trigger backup withholding either—because dollar volume is below $20,000, even though transaction count exceeds threshold. Only when both thresholds exceeded will withholding kick in.
Action Steps Before Compliance Starts
- Talk with your payment platform about their meeting thresholds and withholding policies.
- Sellers should keep accurate records of number of payments and gross amounts per platform.
- Platforms should ensure W-9/identification procedures are in place, factoring in the thresholds when collecting payee information.
- Tax advisors: watch for the final language—definitions of payee, transaction count, gross amounts could evolve.
Bottom Line
The proposed backup withholding rules under the OBBB bring clarity—and relief—for many small sellers and gig workers. But both payment count and payment dollar thresholds must be exceeded to force withholding. Stay up to date: businesses and platforms alike must watch for the final rules and update compliance systems accordingly.