(WASHINGTON, D.C.) — Proposed Department of the treasury and internal revenue service (IRS) regulations would require third-party settlement organizations (TPSOs) to apply backup withholding only when both the $20,000 gross reportable payments and more than 200 transactions to a payee occur in a calendar year, tying withholding more closely to Form 1099-K reporting.
1) Overview of the proposed regulations and their purpose
Department of the Treasury and Internal Revenue Service (IRS) officials released proposed regulations on January 8, 2026, aimed at one practical question: when must a TPSO withhold federal tax from payments it settles for a payee?
Backup withholding is a federal “holdback” rule. In plain terms, a payer may have to withhold a set percentage from certain payments when the payee’s taxpayer information is missing or incorrect, often involving a Taxpayer Identification Number (TIN).
TPSOs care because they sit in the middle of many everyday payments and must run large compliance systems. Payment reporting sits in the same ecosystem—many TPSOs also have Form 1099-K duties tied to payment card and third-party network transactions.
The proposed rules try to align the withholding trigger with the reporting trigger, so the compliance steps follow the same basic measuring stick.
2) Key provisions: backup withholding thresholds for TPSOs
For TPSOs, the proposed regulations set a dual-condition threshold. Under the proposal, backup withholding would generally not apply for a payee unless both the dollar threshold and the transaction-count threshold are exceeded in the same calendar year.
A “reportable payment transaction” is generally a payment that is settled through a third-party payment network and is counted for form 1099-K purposes. Thresholds are measured per payee and per calendar year, so one seller’s totals do not combine with another’s even if both use the same platform.
Think of the test like a two-part gate: the dollar side checks the total gross amount of reportable payment transactions to a single payee during the year, and the count side checks how many reportable payment transactions that payee had during the year.
Only after both gates are passed would backup withholding be required, assuming other backup withholding conditions exist (such as a missing TIN).
3) Statutory background and alignment with Form 1099-K thresholds
ARPA (the American Rescue Plan Act of 2021) changed the Form 1099-K reporting threshold by moving reporting toward a lower dollar trigger rather than the older two-part test.
Later, the one big beautiful bill act (OBBBA)—sometimes referred to in releases as the One, Big, Beautiful Bill—reverted Form 1099-K reporting to the pre-ARPA framework. “Reverted” here means Congress put the old rule back into place, replacing the ARPA approach.
internal revenue code (IRC) Section 3406 is the backbone for backup withholding. Form 1099-K reporting rules govern when TPSOs must report certain payment amounts to the IRS and to payees. Those are different systems, but they interact in day-to-day operations.
When reporting triggers move, withholding rules that were built around those triggers can become mismatched. That mismatch is what these proposed regulations aim to fix by aligning backup withholding thresholds with the restored Form 1099-K approach for payments through third-party payment networks.
Retroactivity can sound intimidating, so here is the practical point: when a statute changes the underlying threshold rule, implementing regulations generally need to reflect that statute. Proposed regulations are one step in that process and are not final rules yet.
4) Important clarifications on how the threshold is applied
Once the dual thresholds are crossed, the “trigger transaction” concept matters. Under the proposal, withholding begins on the transaction that causes the payee to exceed both thresholds—whichever threshold is reached later—and then continues on later transactions in that same calendar year, as applicable.
A concrete example clarifies this. Imagine a payee receives many small payments early in the year through a TPSO but has not provided a TIN. By late in the year, the payee is close to both thresholds.
On a later transaction, the payee finally crosses the line on the second threshold. Under the proposed approach, the TPSO would apply backup withholding to the entire transaction that pushed the payee over the second threshold and to subsequent transactions for that payee for the rest of the year.
Backup withholding is a compliance mechanism, not an indicator of income taxability.
5) Comment period and applicability timeline
March 10, 2026 is the deadline to submit comments on these proposed regulations. A comment period is the public’s chance to respond before rules are finalized.
TPSOs, compliance teams, marketplaces, and tax professionals often comment because operational details can affect systems, customer communications, and reporting design. Regulations.gov is the submission channel; readers generally locate the correct docket by searching for the assigned identifier and confirming the agency and topic.
For this project, the docket is Reg-112829-25. Applicability is a separate concept from the comment deadline: the proposed regulations state they would apply to calendar years beginning after December 31, 2024.
Final rules can keep or change pieces of a proposal, so businesses often plan in parallel: prepare systems based on the proposal while watching for what gets adopted in the final text.
6) Implications for TPSOs and taxpayers
If you are a TPSO or payer, prepare to monitor per-payee annual thresholds and ensure TIN requests are handled promptly to minimize withholding.
TPSOs may see fewer backup withholding events if the dual thresholds stand, because many casual or lower-volume payees may not cross both limits in a year. Still, the obligation does not disappear—a TPSO with missing or incorrect payee information may need to withhold once the payee crosses both threshold gates.
Controls matter: platforms will likely need clean per-payee tracking for gross reportable payment transactions and transaction counts across the full calendar year. Customer support scripts and onboarding flows that request and validate TINs may need updates.
Payees should focus on avoiding preventable withholding by providing a correct TIN and responding to any TIN request notices. Withholding can usually be reconciled on a tax return, but it can create cash-flow pain during the year.
Form 1099-K reporting and backup withholding are related but distinct: reporting tells the IRS and the payee what gross payments were processed, while withholding is money held back and sent to the IRS when payee information problems exist and the trigger rules are met. Taxpayers typically benefit from tracking income independently of any form, especially where refunds, chargebacks, or business expenses are involved.
Watch two dates if you follow this closely: comments are due by March 10, 2026, and the proposal targets calendar years beginning after December 31, 2024.
This article provides general information on proposed regulations. It is not legal or tax advice. Readers should consult a qualified professional for guidance specific to their situation.
Proposed IRS regulations introduce a dual-threshold system for backup withholding by third-party settlement organizations. To trigger withholding, a payee must exceed $20,000 in gross reportable payments and more than 200 transactions annually. This move aligns withholding rules with Form 1099-K reporting requirements. The regulations aim to streamline compliance for platforms while ensuring tax collection from high-volume payees who fail to provide valid taxpayer identification numbers.
