Paid Through an App? The IRS Just Finalized When Payment Platforms Can Hold Back Part of Your Money

Two hundred and one. That’s the payment number in the IRS’s own example where a payment platform, holding money for a seller who never gave it a taxpayer identification number, finally has to start backup withholding, which means sending a slice of each payment straight to the IRS instead of to the seller ^[1]. Final regulations published Aug. 10 lock in that line ^[1]. If you sell crafts online, take payments for lessons through an app or get paid by clients through a payment platform, this one is about when your money can be held back.

What changed on Aug. 10

The Treasury Department and the IRS issued Treasury Decision 10053, which finalizes the backup withholding rules for payments that settle “third party network transactions” ^[1]. Translation: payments that move through a payment app or online marketplace, the companies the tax code calls third party settlement organizations ^[2]. The decision was released Aug. 7 and took effect when it was published ^{[1, 6]}.

The rule itself is short. A platform’s payments to you count as “reportable payments” for backup withholding only after two things are both true for the calendar year ^[1]:

• the platform has made more than 200 payments to you, and
• the total it has paid you is more than $20,000.

Those are the same two numbers that decide whether the platform has to send you and the IRS a Form 1099-K ^{[1, 4]}. Congress tied the two together in section 70432 of the 2025 tax law, Public Law 119-21 ^[4]. Treasury’s job here was to rewrite the regulations to match, and it adopted its January proposal without change ^{[1, 2, 5]}.

How we got from $600 back to $20,000

The 1099-K test started in 2008 at $20,000 and 200 transactions ^[2]. The American Rescue Plan Act of 2021 cut it to $600 with no transaction count ^[2]. The IRS issued a string of notices on the lower threshold (Notices 2023-10, 2023-74 and 2024-85), and the January proposal declared all three obsolete as inconsistent with the new law ^[2].

The 2025 law went all the way back to $20,000 and 200 transactions, and said the change takes effect “as if included” in the 2021 law, which is a way of erasing the $600 rule as though it had never happened ^{[2, 4]}. Backup withholding got a separate effective date: calendar years beginning after December 31, 2024 ^[4].

That’s why the new regulations reach back to 2025. One commenter asked Treasury to apply them only going forward. Treasury said no, so the regulation text wouldn’t contradict the statute Congress had already put in place ^[1].

Here’s the short version: the paperwork line and the withholding line are now the same line, and it’s the old one.

Does this apply to you?

Backup withholding isn’t automatic once you pass the thresholds. Under the regulations, a payor withholds only “if a condition for withholding exists” ^[1]. The IRS’s worked example uses the most common one: the seller didn’t provide a taxpayer identification number after the platform asked for it ^[1]. The amount withheld is pegged to the “fourth lowest rate of tax” in the individual rate table, a rate the statute sets, not the platform ^[1].

The IRS spelled out a four-year chain of examples, and it’s the clearest way to see the rule ^[1]:

• 2026: The platform makes 201 payments totaling $20,000.01 to a seller who never supplied a number. Withholding applies to the entire 201st payment, because that’s the one that crossed the second line, and to every payment after it that year.
• 2027: The seller gets 199 payments totaling $18,000. That’s under both lines, but the platform still withholds on every payment, because the seller’s payments were reportable in 2026.
• 2028: Four payments, $2,000 total. Still withheld, because 2027’s payments were reportable.
• 2030: After a 2029 with no payments at all, another 199-payment, $18,000 year. No withholding. The prior-year link is broken and the seller is under the thresholds.

That 2027 example is the part to underline. Once you’ve been over the line with a platform, the cushion is gone the next year ^{[1, 4]}.

Now two hypotheticals of my own, using only those rules.

Hypothetical one: a ceramics seller with a busy holiday season. Say a hypothetical potter sells 150 mugs through an online marketplace in 2026 for $9,000 in total, and never got around to entering a taxpayer identification number. She’s under both lines, so the marketplace doesn’t backup withhold and doesn’t have to file a 1099-K on her ^{[1, 4]}. Her $9,000 is still income. The IRS and Treasury wrote that “the taxability of payments and the reportability of income on an income tax return are not determined by whether the IRS or the taxpayer receives a Form 1099-K” ^{[1, 5]}.

Hypothetical two: a dog walker paid through an app. Say a hypothetical dog walker gets 260 payments totaling $26,000 through one payment app in 2026, and his number is on file and correct. He’s over both lines, so he can expect a 1099-K ^[4]. Crossing the thresholds alone doesn’t start withholding, though; with no withholding condition, the app doesn’t hold anything back ^[1].

One more detail matters if you split your sales. The IRS and Treasury said the thresholds apply per “participating payee,” and a commenter asked that platforms be required to combine accounts that share an identification number ^[1]. Treasury called that request outside the scope of these regulations, while agreeing it was helpful to clarify the per-payee point ^[1]. A commenter also asked Treasury to say the new threshold isn’t a safe harbor for account-splitting; that, too, was ruled out of scope ^[1].

Your next step with your payment apps

Start with the number. If a platform asks for your taxpayer identification number, give it ^[1]. That alone keeps you out of the situation in the IRS’s example.

Then keep your own count, per platform, of transactions and gross dollars. If you were over 200 and $20,000 with a platform in 2025, your 2026 payments from it don’t get the cushion if a withholding condition exists ^[1].

This is the opposite of the voluntary arrangement in the Senate IRS bill I wrote about in my column on the Taxpayer Assistance and Service Act, where a contractor could ask a client to withhold. Backup withholding is the involuntary version, and the regulations decide when it can kick in ^[1].

Treasury told the SBA’s Office of Advocacy about the proposal; Advocacy sent no comments ^[1]. Treasury certified the rule won’t have a significant economic impact on small entities, because a higher threshold means platforms backup withhold less often ^[1].

What I’m keeping an eye on

The $2,000 threshold for 1099-NEC and 1099-MISC. The same 2025 law raised the reporting line for payments to contractors from $600 to $2,000 for payments made after December 31, 2025, with inflation indexing after 2026, and raised the backup withholding line on those payments with it ^[3]. Treasury proposed conforming regulations in April and took comments through June 16 ^[3]. I’ll be watching for that final rule.

Dec. 31. The 2026 count of transactions and dollars closes at year-end, and under the lookback rule it decides how 2027 starts for anyone with a withholding condition ^[1].

— Sally