The US Department of the Treasury and IRS finalised regulations on 10 August 2026 that align backup withholding rules for third-party network transactions with statutory thresholds introduced by the One Big, Beautiful Bill Act, requiring withholding only when payees exceed both 200 transactions and USD 20,000 in aggregate payments within a calendar year.
The US Department of the Treasury and the IRS have issued final regulations (TD 10053) adopting, without changes, the proposed regulations (REG-112829-25) published on 9 January 2026. The regulations align the backup withholding rules for third-party network transactions with the reporting thresholds introduced by the One Big, Beautiful Bill Act (OBBBA).
The regulations went into effect on 10 August 2026, and apply to payments made in calendar years beginning after 31 December 2024.
Dual threshold mechanics for backup withholding
Under IRC section 3406, a payor must perform backup withholding (calculated using the fourth lowest rate of tax under section 1(c) of the Code) if a withholding condition exists, such as when a payee fails to provide a Taxpayer Identification Number (TIN). For third-party network transactions settled through third-party settlement organisations (TPSOs), such as online marketplaces and payment applications, backup withholding is only triggered if both of the following statutory thresholds are crossed in a single calendar year:
- Transaction threshold: The payee exceeds 200 transactions.
- Dollar threshold: The aggregate gross transaction amount exceeds USD 20,000.
When a payee meets the conditions for withholding, the tax is applied starting on the entire amount of the transaction that causes the second of the two thresholds to be exceeded (whichever occurs later), as well as on all subsequent transactions settled for that payee during the remainder of the calendar year.
Preceding year rule (“First-Dollar withholding”)
The de minimis threshold exception does not apply if one or more payments settled by the payor to that payee in the preceding calendar year were reportable payments. Under this “preceding year exception,” if a withholding condition remains in effect, backup withholding will apply to every transaction starting from the first dollar in the subsequent year, regardless of whether the payee eventually exceeds the 200-transaction or USD 20,000 thresholds in that subsequent year.
Public comments and IRS decisions
The IRS received eight public comments on the proposed regulations but adopted them without any modifications. Key clarifications provided in the preamble include:
- Taxability vs. reporting: The taxability of a payee’s income is entirely independent of whether they receive a Form 1099-K or are subject to backup withholding. Payees must report all taxable income regardless of these thresholds.
- No safe harbours: The thresholds do not serve as a safe harbour for transaction structuring or account-splitting to bypass reporting, and the IRS maintains full examination tools to verify income.
- Internal aggregation: Payors (TPSOs) are responsible for internally aggregating accounts that share identical identifying information or TINs pointing to common beneficial ownership.
- Scope limitations: The IRS rejected proposals to exempt other payment categories (such as digital commodity settlements, patent royalties, or defence technology payments), noting these regulations are strictly limited to third-party network transactions.
- Statutory thresholds: The agencies clarified they do not have the administrative authority to raise the thresholds to taxpayer-requested amounts (such as USD 200,000 and 10,000 transactions) because those levels are statutory limits established by Congress.
Economic and reporting impact
- Small business relief: The regulations are certified under the Regulatory Flexibility Act to not have a significant economic impact on a substantial number of small entities. Because the threshold increases from previous limits, it actually reduces the frequency with which payors must perform backup withholding, lowering administrative compliance burdens.
- Associated forms: Reporting and recordkeeping are integrated with Form 945 (Annual Return of Withheld Federal Income Tax) under OMB control number 1545-0029, with administrative burdens factored into Form 941 (Employer’s Quarterly Federal Tax Return) instructions.
