What Changed with Backup Withholding
Under the One, Big, Beautiful Bill (OBBB), enacted July 2025, the threshold at which third-party settlement organizations (e.g. payment apps, marketplaces) must perform backup withholding has been raised significantly. Previously, gross payments exceeding $600 triggered both reporting and backup withholding. The new proposed rule requires that two thresholds be exceeded:
- Total payments to a payee in a calendar year exceed $20,000, and
- The total number of transactions exceeds 200. (irs.gov)
If neither or only one of those is met, backup withholding generally does not apply under these rules. This aligns with the reinstated Form 1099-K reporting thresholds also established by OBBB. (irs.gov)
Who Needs to Pay Attention?
- Small sellers on platforms (e.g. Etsy, eBay, freelancing services) who occasionally receive payments. They may have been alarmed by the old $600 rule but now may fall under the milder thresholds.
- Payment platforms and third-party settlement organizations. They’ll need to track two metrics per payee: total gross payments and number of transactions. (irs.gov)
- Freelancers and gig economy workers: if you expect many small transactions, you may avoid backup withholding if under both thresholds.
What You Should Do Now
- If you’re a seller or service provider: track both the dollar amount and number of payment transactions to determine exposure to backup withholding.
- If you’re a payment platform: ensure your software systems can flag when both thresholds are exceeded, not just one.
- Maintain detailed records: even payments not subject to backup withholding still may need reporting via 1099-K if both thresholds are met. (irs.gov)
Practical Example
Jane is an artist who sells prints online through a marketplace. In 2025 she sold 150 prints for a total of $18,000. Under the old $600 threshold, many of those payments might have triggered backup withholding if processed differently. Under the new proposed regulation, since she had 150 transactions (less than 200) and $18,000 (less than $20,000), she will not be subject to backup withholding—even though she exceeds $600.
Pending Nature and Implementation Timeline
These are proposed regulations, issued in early January 2026, and are not yet final. Comments are being accepted via regulations.gov. Final rules may adjust details or applicability. (irs.gov)
Key Tips
- Monitor both your payments total and transaction count—meeting both triggers the rule.
- Review payment platform statements early; sometimes payments are aggregated.
- Consult with a tax professional if you frequently use multiple platforms—aggregated reporting could trigger thresholds in unexpected ways.
Bottom line: The raised thresholds mean fewer taxpayers face backup withholding, but data tracking and reporting remain crucial—whether you’re paying or receiving payments.