A quiet but consequential tweak landed at the Treasury this week: proposed regulations from the Department of the Treasury and the Internal Revenue Service would change when third‑party payment platforms must perform backup withholding on payments they settle.
What the proposal says
Under the draft rules, third‑party settlement organizations (think PayPal, Venmo, Etsy and similar payment networks) generally would not be required to perform backup withholding on amounts they settle through their networks unless a payee’s gross reportable transactions exceed $20,000 and the number of those transactions exceeds 200.
That mirrors the reporting threshold for Form 1099‑K reinstated by the One, Big, Beautiful Bill (OBBB), which reversed the lower $600 threshold that had been adopted by the American Rescue Plan Act of 2021. The agencies are seeking public comment on the proposed rules via regulations.gov. You can also read the Treasury and IRS announcement on the IRS website (IR‑2026‑03, Jan. 8, 2026).
Why this matters
For merchants, gig workers, hobby sellers and small businesses that rely on third‑party payment networks, the change removes a mismatch that emerged after Congress and the IRS altered reporting rules but left backup withholding guidance behind. Under the old post‑2021 approach, platforms faced inconsistent triggers for reporting (Form 1099‑K) versus withholding, creating compliance headaches and potentially unexpected cash‑flow hits for payees.
If finalized, the proposed regs would align the practical withholding obligations of payment platforms with the revived $20,000/200‑transaction reporting floor in the OBBB — reducing the likelihood that a platform must withhold from a payee who wouldn’t receive a Form 1099‑K under the statute.
The IRS makes a key point worth repeating: these thresholds affect paperwork and withholding mechanics, not whether income is taxable. Even if a payer doesn’t receive a 1099‑K or isn’t subject to backup withholding, they may still owe tax on the income they received.
Nuts and bolts for platforms and advisers
The draft guidance also clarifies how "reportable payments" are defined for withholding purposes and appears to incorporate the de minimis rules found in section 6050W(e). Practitioners warn this is a technical shift from the prior regulatory framework and will require TPSOs (third‑party settlement organizations) to update compliance and tracking systems so they can monitor both current‑year aggregates and prior‑year reporting status of payees.
Some takeaways for affected parties:
- Platforms should review their withholding engines and reporting workflows now; the proposed regulations are intended to apply to payments in 2025 and later.
- Small sellers and gig workers should not assume that a lack of a 1099‑K or withholding means the income is tax‑free — keep good records.
- Interested stakeholders can submit comments on the proposal at regulations.gov during the notice and comment period.
What comes next
The Treasury and IRS are accepting public comments on the proposed rule. After the comment window closes and the agencies review input, they may revise the text before issuing final regulations. Because the change aims to align withholding with reporting thresholds already set by statute, many observers expect it to ease administrative burdens for payment processors and payees — but the final technical language will determine how smooth that transition is.
If you advise payment platforms or run a small‑scale business that depends on third‑party settlement networks, now is a good moment to flag questions for counsel or your tax preparer and to watch for the final rule.
For the official agency announcement, see the Treasury/IRS release on the IRS site.