Introduction
On Jan. 9, 2026, the U.S. Department of the Treasury (Treasury) and the IRS issued proposed regulations (REG-112829-25) that provide significant clarification for payment providers acting as third-party settlement organizations (TPSOs) regarding their backup withholding responsibilities under section 3406. The proposed rules aim to resolve a key ambiguity in changes to Form 1099-K reporting thresholds set forth under OBBBA by aligning the trigger for back-up withholding on Form 1099-K reportable payments as set forth in section 3406, with the de minimis reporting thresholds set forth under section 6050W. This alert discusses the proposed changes, evaluates their impact and explores important steps to take now to prepare for these changes.
Background
Section 6050W requires payment settlement entities (PSEs), including merchant acquiring entities and TPSOs, to report payments made to participating payees on Form 1099-K, Payment Card and Third-Party Network Transactions. Form 1099-K is used by PSEs to report payments for goods and services that are made through: (1) payment cards such as credit, debit, gift or other stored value card; or (2) third-party payment networks by TPSOs, such as payment apps, platforms and online marketplaces. OBBBA amended section 6050W by increasing the 1099-K reporting threshold for TPSOs from $600 and no minimum number of transactions to over $20,000 and more than 200 transactions retroactive to tax year 2022. (Refer to our prior article and alert for details).
In addition to this reporting requirement, payors, including TPSOs, are required to deduct U.S. backup withholding on certain Form 1099-K reportable payments under section 3406 if, for example, a payee fails to provide a correct taxpayer identification number (TIN) on or before the date of payment. Generally, under section 3406(b)(4), whether a payment is reportable is determined without regard to the minimum amount that must be paid before a return is required. Therefore, a key ambiguity exists with respect to back-up withholding on Form 1099-K reportable payments for TPSOs given the new thresholds set forth under OBBBA. As such, requirements for back-up withholding are unclear. The ambiguity exists because the general definition of a Form 1099-K reportable payment does not reference minimum dollar thresholds, so it is unclear whether back-up withholding applies when payments may not be reportable because amounts either do not exceed the $20,000, do not exceed 200 transactions, or both.
What does this proposed regulation change?
Treasury and the IRS have issued proposed regulations that aim to resolve this ambiguity by aligning the backup withholding rules with the Form 1099-K reporting thresholds for TPSOs. See REG-112829-25. The proposed regulations clarify that for a TPSO, a payment in settlement of a third-party network transaction is treated as a ‘reportable payment’ subject to backup withholding only if, at the time of payment, the payee has met both of the following conditions for the calendar year:
- The aggregate number of transactions exceeds 200; and
- The aggregate dollar amount of payments exceeds $20,000.
Furthermore, the regulations propose that the amount subject to withholding is the entire amount of the transaction that causes the payee to cross the second of these two thresholds, whichever occurs later, as well as the full amount of any subsequent payments made to that payee during the calendar year. Finally, the proposed regulations clarify that the de minimis exception does not apply if one or more payments made by the TPSO to a payee during the prior calendar year were reportable payments. This change will require TPSOs to track payments that were reportable in prior years, which could prove to be challenging depending on the volume of transactions, systems and processes involved.
The regulations are proposed to apply to payments made in calendar years beginning after Dec. 31, 2024. Notably, because the existing regulations under section 6050W already reflect the reporting threshold as codified in the OBBBA, the proposed regulations do not alter the text of the regulations under section 6050W. Instead, they update section 3406 to reflect the statutory changes made to section 3406(b) under OBBBA.
How will this impact TPSOs?
The proposed regulations provide welcome clarity for TPSOs by harmonizing the back-up withholding trigger with Form 1099-K reporting requirements. The primary impact is that TPSOs will not have a back-up withholding obligation for a payee until that payee has reached both the transaction and dollar thresholds. The clarification reduces reputational risk as well as the risk of noncompliance associated with potential under or over withholding. It also significantly reduces the administrative burden of monitoring for back-up withholding on smaller-value accounts that do not meet the de minimis reporting exception. The clarification of the amount subject to withholding is also critical. TPSOs will need to ensure their systems can identify the single transaction that pushes a payee over the combined thresholds and apply withholding to that entire transaction amount, not just the portion that exceeds the threshold.
Payees will also be relieved not to have payments subject to withholding unless it is required, which reduces the need for refund claims and avoids the inconvenience of contacting TPSOs to determine why withholding occurred.
How can RSM US help?
RSM’s cross-functional team of information reporting and systems specialists can assist companies with the following:
- Reviewing and updating systems: We can assist with evaluating current payment and tax compliance systems to ensure accurate tracking of both transaction counts and aggregate dollar amounts for each payee in real-time
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- Configuring triggers for back-up withholding: We assist taxpayers with configuring systems for flagging and identifying reporting payments exceeding both the new 200 transaction and $20,000 threshold and with ensuring that the system is capable of initiating backup withholding on the full amount of that triggering transaction and all subsequent transactions for the year
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- Monitoring for final regulations: While these regulations are proposed to be effective for 2025, we can assist your team with monitoring important regulatory developments and any potential modifications required for ongoing compliance with changes.
- Reviewing prior year data: The proposed rules state that the de minimis exception does not apply if the payee had reportable payments in the prior year. RSM can assist taxpayers with reviewing the prior year's reporting status to determine if withholding obligations apply from the first dollar in the current year.
