In IRS Notice 2011-42 issued in May 2011, the IRS provided interim guidance for Third Party Settlement Organizations (TPSOs) with regard to backup withholding on payments to its participating payees. The Notice eases backup withholding obligations for TPSOs, who may rely on this interim guidance until Section 3406 regulations are amended.
The Notice provides that the Section 6050W 200 transactions minimum threshold for determining information reporting obligations should be met before any backup withholding obligation arises for TPSOs. Notice 2011-42 eases requirements so that no backup withholding is required where the aggregate number of transactions between a TPSO and a payee does not exceed 200 within a calendar year.
Notice 2011-42 makes clear, however, that the $20,000 minimum reporting threshold in Section 6050W is not considered for purposes of determining backup withholding obligations.
The relief provided in Notice 2011-42 applies only to third-party settlement organizations. It does not apply to payment card transactions subject to backup withholding, which have no similar minimum threshold limits.
At present, there is some confusion about how the withholding should be applied once the 200 transaction limit is reached for a given payee. Assuming the 200 limit is reached, it is unclear whether the backup withholding obligation would apply only to subsequent payments or to all payments in the calendar year.
Note: Though information reporting obligations under Section 6050W are in effect for calendar year 2011, backup withholding obligations are effective for payments beginning in 2012.