What's Happening?
The Treasury Department and the Internal Revenue Service (IRS) have issued proposed regulations to revise the threshold for when third-party settlement organizations must perform backup withholding. This
move is in response to changes under the One Big Beautiful Bill Act (OBBBA). The OBBBA has reinstated the previous threshold for reporting payments, setting it at $20,000 and over 200 transactions, a significant increase from the $600 threshold established by the American Rescue Plan Act of 2021. The IRS had delayed the implementation of the lower threshold due to concerns about the compliance burden. The proposed regulations aim to clarify that third-party settlement organizations are not required to perform backup withholding unless the gross amount of reportable payment transactions to a payee exceeds $20,000 and the number of transactions exceeds 200. The IRS is seeking comments from interested parties on these proposed regulations.
Why It's Important?
The proposed changes are significant for businesses and individuals who use third-party payment platforms like eBay, PayPal, and Venmo. By raising the threshold for reporting, the IRS aims to reduce the compliance burden on small businesses and individuals who may have been affected by the lower threshold. This change could potentially ease the administrative load on these entities, allowing them to focus more on their core operations rather than tax compliance. However, it also underscores the importance of accurate income reporting, as the IRS reminds taxpayers that the absence of a Form 1099-K does not exempt them from tax obligations. The proposed regulations could impact how businesses manage their financial reporting and tax planning strategies.
What's Next?
The proposed regulations are set to apply to payments in 2025 and beyond. The IRS is currently accepting comments from the public, which can be submitted via regulations.gov. This feedback process will likely influence the final form of the regulations. Tax professionals and businesses are advised to review their backup withholding systems to ensure compliance with the new thresholds. The IRS's decision to seek public input suggests that there may be further refinements to the regulations based on stakeholder feedback. Businesses and tax practitioners should stay informed about these developments to adapt their practices accordingly.
