Proposed Regs Reflect OBBBA Change to Backup Withholding on Third Party Payments

(Parker Tax Publishing January 2026)

The IRS issued proposed regulations under Code Sec. 6050W that revise the threshold for when certain third-party settlement organizations are required to perform backup withholding o comply with changes made by the One Big Beautiful Bill Act. The proposed regulations provide that third party settlement organizations generally are not required to backup withhold on payments settled through third party payment networks unless the gross amount of reportable payment transactions to a payee exceeds $20,000 and the number of transactions exceeds 200. REG-112829-25.

Background

Code Sec. 6050W requires payment settlement entities, including merchant acquiring entities and third party settlement organizations (TPSOs), to report certain payments made to participating payees for reportable payment transactions. Code Sec. 6050W(b) requires TPSOs to file information returns reporting the gross amounts of reportable payments made in settlement of third party network transactions. These payments are reported on a Form 1099-K, Payment Card and Third Party Network Transactions.

As originally enacted in 2008, Code Sec. 6050W required TPSOs to file information returns if payments to a payee exceeded $20,000 and 200 transactions in a calendar year. In 2021, the American Rescue Plan Act of 2021 (ARPA) (Pub. L. 117-2) amended Code Sec. 6050W(e) to lower the TPSO reporting threshold, requiring reporting by TPSOs when payments to a payee exceeded $600 in a calendar year, without regard to the number of transactions. The One Big Beautiful Bill Act (Pub. L. 119-21) (OBBBA) retroactively reverted the reporting threshold to the pre-ARPA level, requiring reporting by a TPSO when payments to a payee exceed $20,000 and 200 transactions in a calendar year.

Code Sec. 3406(a) requires backup withholding for reportable payments where certain conditions are met. Under Code Sec. 3406(b)(3)(F), a reportable payment includes payments required to be shown on a return required under Code Sec. 6050W. Generally, under Code Sec. 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.

The OBBBA amended Code Sec. 3406(b) by adding a new paragraph (8) that applies to calendar years beginning after December 31, 2024. Code Sec. 3406(b)(8)(A) provides that any payment in settlement of a third party network transaction required to be shown on a return required under Code Sec. 6050W that is made during any calendar year is treated as a reportable payment only if (1) the aggregate number of transactions with respect to the participating payee during such calendar year exceeds the number of transactions specified in Code Sec. 6050W(e)(2), and (2) the aggregate dollar amount of transactions with respect to the participating payee during such calendar year exceeds the dollar amount specified in Code Sec. 6050W(e)(1) at the time of such payment.

Code Sec. 3406(b)(8)(B) provides that Code Sec. 3406(b)(8)(A) does not apply with respect to payments to any participating payee during any calendar year if one or more payments in settlement of third party network transactions made by the payor to the participating payee during the preceding calendar year were reportable payments.

REG-112829-25

On January 8, the IRS issued proposed regulations that would update the regulations under Code Sec. 3406 to reflect the statutory changes made to Code Sec. 3406(b) by the OBBBA.

The proposed regulations would clarify that in the case of payments made in settlement of third party network transactions, the amount subject to withholding under Code Sec. 3406 is determined with regard to the exception for de minimis payments by TPSOs in Code Sec. 6050W(e) and the associated regulations. Thus, under the proposed regulations, a payment would be treated as a reportable payment under Reg. Sec. 31.3406(b)(3)-5(a) only if (1) the aggregate number of transactions with respect to the participating payee during the calendar year exceeds the number of transactions specified in Code Sec. 6050W(e)(2) (currently 200); and (2) the aggregate dollar amount of the current transaction and all previous transactions to the participating payee during the calendar year exceeds the dollar amount specified in Code Sec. 6050W(e)(1) at the time of such payment (currently $20,000).

The proposed regulations would also clarify that the amount subject to withholding is the entire amount of the transaction that causes either the total number of transactions to exceed the number of transactions specified in Code Sec. 6050W(e)(2), or the entire amount of the transaction that causes the total dollar amount paid to the payee to exceed the dollar amount specified in Code Sec. 6050W(e)(1) at the time of such payment, whichever occurs later, and the amount of any subsequent transactions made to the payee during the calendar year.

Finally, the proposed regulations would clarify that the exception in Prop. Reg. Sec. 31.3406(b)(3)-5(b)(2) would not apply with respect to payments to any participating payee during any calendar year if one or more payments in settlement of third party network transactions made by the payor to the participating payee during the preceding calendar year were reportable payments.

The regulations are proposed to apply with respect to payments made in calendar years beginning after December 31, 2024.

For a discussion of reporting third party network transactions on Form 1099-K, see Parker Tax ¶252,557.

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