Treasury and the IRS have finalized the regulations that tell third-party settlement organizations when to start backup withholding on payments moving through their networks. A TPSO is the payment app or online marketplace sitting between buyer and seller. Think PayPal, Venmo, Cash App, eBay, Etsy and Airbnb when they operate in that role. The final regulations adopt the January 2026 proposed regulations (REG-112829-25) without change and apply to payments made in calendar years beginning after December 31, 2024, which means 2025 payments are already inside the window.
Section 70432(b)(1) of OBBBA (Pub. L. 119-21) amended §3406(b) to tie the backup withholding threshold to the restored de minimis reporting threshold in §6050W(e). A TPSO has no Form 1099-K obligation for third-party network transactions unless the participating payee exceeds both 200 transactions and $20,000 of gross payments during the calendar year, and under Reg. §31.3406(b)(3)-5(b)(2) it has no backup withholding obligation either. Watch the word exceeds. Two hundred transactions totaling exactly $20,000 does not get there.
Why Exceeding the Threshold Does Not Start Withholding
Crossing $20,000 and 200 transactions does not, by itself, cause backup withholding. It only makes the payment reportable. A separate withholding condition under §3406(a) still has to exist, and in practice that is almost always the payee’s failure to furnish a correct taxpayer identification number after the platform has properly solicited it.
Example. Maria sells handmade jewelry online and takes customer payments through a platform. She has not given the platform a correct TIN despite its required requests. After 200 transactions totaling exactly $20,000, the platform does not yet withhold, because Maria has not exceeded either threshold. Maria then receives a 201st payment of $100. Her annual totals become 201 transactions and $20,100, so both thresholds are now exceeded. The platform must backup withhold on the entire $100, not just the excess, and it does not go back and withhold on the first $20,000. At the current 24% rate, the fourth lowest rate under §1(c), that is $24 withheld from Maria’s $100 payment, and every later payment to Maria that year is subject to withholding as well.
Which Transaction Gets Withheld
Reg. §31.3406(b)(3)-5(b)(2) reaches the entire transaction that causes the count threshold to be exceeded, or the entire transaction that causes the dollar threshold to be exceeded, whichever occurs later, plus every subsequent transaction that calendar year. Maria crossed both at once, which is tidy but uncommon. A seller with 300 small sales passes 200 transactions months before reaching $20,000. A seller with a handful of large sales passes $20,000 long before the 200th transaction. In both cases withholding starts at the later crossing, so the platform has to track both counters, not just the one that moves faster.
How a Reportable Payment Last Year Overrides This Year's Thresholds
Under Reg. §31.3406(b)(3)-5(b)(3), if the platform made any reportable payment to that payee during the preceding calendar year, this year’s thresholds are irrelevant. Withholding applies to every payment, beginning with the first one. The regulations run the point out through their own examples. A payee who trips the threshold in 2026 is withheld on across all 199 payments totaling $18,000 in 2027, and again on all four payments totaling $2,000 in 2028. The clock resets only after a full calendar year in which the platform makes no reportable payments to that payee.
Tax Practitioner Planning
A corrected Form W-9 stops the withholding going forward, but it does not undo the lookback. A client who let backup withholding start in one year gets withheld on from the first dollar the next year and stays there until a clean year passes. The withheld tax is recoverable as a credit on the return, so this is a cash flow problem rather than a permanent cost, but the client can be out of the money through two filing seasons. It is worth a call to any client running meaningful volume through a platform.
Sources:
- D. 10053, Backup Withholding on Third Party Network Transactions, 91 Fed. Reg. 51391 (Aug. 10, 2026)
- §31.3406(a)-1
- §31.3406(b)(3)-5
- IRC §3406
- IRC §6050W(e)
- OBBBA §70432(b)(1), Pub. L. 119-21.
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