The IRS has issued proposed regulations that would update backup withholding rules for third-party network transactions. These changes reflect recent statutory amendments and primarily affect third-party settlement organizations (TPSOs) that facilitate payments for these transactions. (IR 2026-3; Preamble to Prop Reg REG-112829-25, 1/8/2026)
Background on Section 6050W and 3406
Generally, IRC § 6050W requires TPSOs to report certain reportable payment transactions made to payees. Originally, TPSOs were required to file information returns if reportable payments to a payee exceeded $20,000 and 200 transactions in a calendar year.
In 2021, legislation lowered this reporting threshold to $600, without regard to the number of transactions. However, the One Big Beautiful Bill Act (OBBBA, P.L. 119-21), enacted July 4, 2025, retroactively reverted the reporting threshold for TPSOs to the pre-ARPA levels of $20,000 and 200 transactions in a calendar year.
These payments are reported on Form 1099-K, Payment Card and Third Party Network Transactions.
IRC § 3406(a) generally requires backup withholding for reportable payments when certain conditions are met. Prior to the OBBBA, whether a payment was reportable for backup withholding purposes was determined without regard to the minimum reporting amount.
OBBBA Amends Reporting Thresholds
The OBBBA added § 3406(b)(8), which is effective for calendar years beginning after December 31, 2024. This amendment specifies that a payment in settlement of a third-party network transaction is treated as a reportable payment for backup withholding purposes only if:
- The aggregate number of transactions with the participating payee during the calendar year exceeds the transaction threshold specified in IRC § 6055W(e)(2) (currently 200).
- The aggregate dollar amount of transactions with the participating payee during the calendar year exceeds the dollar amount specified in IRC § 6050W(e)(1) (currently $20,000) at the time of such payment.
Proposed Regs Clarify Backup Withholding Requirements
The proposed regulations would clarify that the amount subject to backup withholding under § 3406 for third-party network transactions is determined with regard to the de minimis payment exception in § 6050W(e). This means backup withholding would only apply if both the transaction volume and dollar amount exceed the pre-ARPA thresholds (200 transactions and $20,000).
Note. The proposed regulations also would clarify that the amount subject to withholding is the entire amount of the transaction that causes either the total number of transactions or the total dollar amount paid to exceed the specified thresholds, whichever occurs later, and any subsequent transactions made during the calendar year.
Examples of How the Rules Apply
The proposals provide examples to illustrate how they would apply. For instance, if a TPSO makes 201 payments totaling $20,000.01 to a payee in 2026, and the payee has not provided a taxpayer identification number (TIN), the TPSO must backup withhold on the entire 201st transaction because it caused the payee to exceed both the 200-transaction and $20,000 thresholds.
Applicability Date and Obsoleted Guidance
These proposed regulations would apply to payments made in calendar years beginning after December 31, 2024.
Note. As a result of these statutory revisions, Notice 2023-10, Notice 2023-74, and Notice 2024-85 are inconsistent with the new rules and are obsoleted as of January 9, 2026.
Comments and Public Hearing
The IRS is requesting comments on all aspects of the proposed rules. Comments and requests for a public hearing must be received by March 10, 2026. Electronic submissions can be made via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-112829-25).
For more information about filing requirements for Form 1099-K, see Checkpoint’s Federal Tax Coordinator 2d ¶ S-3791.
For information about payment card and third-party payment network transactions as reportable payments for backup withholding, see Checkpoint’s Federal Tax Coordinator 2d ¶ J-9126.2.
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