Rule2026-16269
Backup Withholding on Third Party Network Transactions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 10, 2026
Effective
August 10, 2026
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations governing backup withholding on reportable payments with respect to third party network transactions. The final regulations reflect recent changes to the statutory law that affect the backup withholding requirements for third party settlement organizations who make payments in settlement of third party network transactions.
Full Text
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<title>Federal Register, Volume 91 Issue 152 (Monday, August 10, 2026)</title>
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[Federal Register Volume 91, Number 152 (Monday, August 10, 2026)]
[Rules and Regulations]
[Pages 51391-51395]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-16269]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 10053]
RIN 1545-BR80
Backup Withholding on Third Party Network Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations governing backup
withholding on reportable payments with respect to third party network
transactions. The final regulations reflect recent changes to the
statutory law that affect the backup withholding requirements for third
party settlement organizations who make payments in settlement of third
party network transactions.
DATES:
Effective date: These regulations are effective on August 10, 2026.
Applicability dates: For dates of applicability, see Sec. Sec.
31.3406(a)-1(e) and 31.3406(b)(3)-5(e).
[[Page 51392]]
FOR FURTHER INFORMATION CONTACT: Casey Conrad, Office of Associate
Chief Counsel (Procedure and Administration) at (202) 317-6844 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments to the Regulations on Employment
Taxes and Collection of Income Tax at the Source (26 CFR part 31) under
section 3406 of the Internal Revenue Code (Code). The final regulations
are issued under the authority conferred by section 3406(i) of the
Code, which provides the Secretary of the Treasury or the Secretary's
delegate (Secretary) with authority to ``prescribe such regulations as
may be necessary or appropriate to carry out the purposes of [section
3406].''
The final regulations are also issued pursuant to section 7805(a)
of the Code, which authorizes the Secretary to ``prescribe all needful
rules and regulations for the enforcement of [the Code], including all
rules and regulations as may be necessary by reason of any alteration
of law in relation to internal revenue.''
Background
This document contains amendments to regulations under 26 CFR part
31. On January 9, 2026, the Department of the Treasury (Treasury
Department) and the IRS published in the Federal Register (91 FR 934) a
notice of proposed rulemaking (REG-112829-25) proposing amendments to
the regulations governing backup withholding on third party network
transactions under section 3406 (proposed regulations) to reflect the
statutory changes made to section 3406(b) by section 70432 of Public
Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One,
Big, Beautiful Bill Act (OBBBA). No public hearing was requested or
held with respect to the proposed regulations.
The Treasury Department and the IRS received eight comments in
response to the proposed regulations. After consideration of these
comments, the proposed regulations are adopted without change. To the
extent not inconsistent with the Summary of Comments section of this
preamble, the Explanation of Provisions section of the preamble to the
proposed regulations is incorporated in this document.
Summary of Comments
One commenter suggested that the changes to the final regulations
take place prospectively only. The final regulations do not adopt this
comment. The changes to section 3406 made by section 70432(b)(1) of the
OBBBA apply to calendar years beginning after December 31, 2024. These
final regulations remove provisions from the existing regulations that
conflict with section 3406, as amended by the OBBBA, and implement the
changes to section 3406 made by the OBBBA. Thus, to prevent taxpayer
confusion that might arise from a conflict between the statutory text
of section 3406 and the text of the regulations, and to adhere to the
effective date prescribed in the OBBBA by Congress for the changes made
to section 3406, the applicability date for these final regulations
mirrors the effective date of section 70432(b)(1) of the OBBBA (that
is, the final regulations apply with respect to payments made in
calendar years beginning after December 31, 2024), consistent with the
proposed regulations.
One commenter expressed general support for the proposed
regulations but recommended that the Treasury Department and the IRS
include additional information in the preamble to this Treasury
decision. The commenter recommended the Treasury Department and the IRS
add a compliance-and-enforcement-implications section to this preamble
to reduce tax controversy disputes and clarify that: (1) the taxability
of income is not affected by the absence of a Form 1099-K, Payment Card
and Third Party Network Transactions, or the absence of backup
withholding on payments made in settlement of third party network
transactions; (2) the new de minimis threshold for backup withholding
does not create a safe harbor for structuring, account-splitting, or
other conduct intended to avoid information reporting or backup
withholding; and (3) that the IRS may use enforcement tools during an
examination to confirm the amount of a taxpayer's income regardless of
whether a taxpayer exceeds the de minimis third party settlement
organization (TPSO) reporting or backup withholding threshold.
Although these recommendations are outside of the scope of these
regulations, the Treasury Department and the IRS agree that it is
important to emphasize 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, or by whether
backup withholding is required with respect to a third party network
transaction.
This commenter also recommended that the Treasury Department and
the IRS clarify that TPSOs are responsible for internally aggregating
multiple accounts with identical identifying information indicating
common beneficial ownership or the same taxpayer identification number.
Although this comment is also outside of the scope of these
regulations, the Treasury Department and the IRS agree that it is
helpful to clarify that the de minimis TPSO reporting and backup
withholding thresholds referenced throughout this Treasury decision
apply with respect to each participating payee, as defined by section
6050W(d)(1).
Three commenters expressed concerns that the proposed regulations
were confusing or could be drafted more clearly, but none suggested any
alternative language or clarifying edits. The final regulations do not
make any changes with respect to these comments, as the final
regulations merely implement statutory changes in response to changes
made by section 70432(b)(1) of the OBBBA.
One commenter submitted three separate comments and attached
documents. In one comment, the commenter requested that the IRS
transmit the commenter's comment and all related materials to the
Office of Management and Budget (OMB), the Office of Information and
Regulatory Affairs (OIRA), the Government Accountability Office (GAO),
and the Department of the Treasury Office of Inspector General for
independent review under the Paperwork Reduction Act, the
Administrative Procedure Act, the Regulatory Flexibility Act, and
various Executive Orders governing regulatory review, economic impact,
and burden reduction. The commenter suggested that the Treasury
Department and the IRS failed to comply with relevant administrative
requirements in promulgating the proposed regulations, or at the least
understated the expected burden and economic impact on taxpayers.
The Treasury Department and the IRS complied with all relevant
administrative laws, including the Paperwork Reduction Act, the
Administrative Procedure Act, the Regulatory Flexibility Act, and
applicable Executive Orders in the promulgation of the proposed
regulations and these final regulations. The description of the
Treasury Department and the IRS's compliance with these administrative
requirements can be found in the Special Analyses section of the
proposed regulations and the Special Analyses section in this Treasury
decision.
The commenter also submitted thirty attachments that consisted of
requests and demands, the substantial majority of which were outside of
the scope of
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the proposed regulations. For example, the commenter requested that the
Treasury Department and the IRS coordinate with the Commodity Futures
Trading Commission (CFTC) to issue joint guidance clarifying that CFTC
commodity classification governs the section 3406 backup withholding
treatment of digital commodity settlement payments. The commenter also
requested that the Treasury Department and the IRS exempt certain types
of payments from all backup withholding, including patent royalty
payments, dividend payments, and payments for defense-related goods and
services to defense technology companies registered under International
Traffic in Arms Regulations (22 CFR parts 120 through 130). No changes
were made based on these comments because these final regulations are
limited to backup withholding on third party network transactions, not
any broader issues related to backup withholding.
The remaining comments were tangentially related to the subject
matter of the proposed regulations on their face but are nonetheless
outside of the scope of these regulations. For example, one commenter
requested that the Treasury Department and the IRS analyze the impact
of adopting different section 6050W de minimis TPSO reporting
thresholds and adopt the commenter's desired threshold of $200,000 in
payments and 10,000 transactions. The Treasury Department and the IRS
lack the authority to change the statutorily prescribed amount of the
de minimis TPSO reporting threshold in these final regulations.
Instead, the final regulations implement the statutory requirement
under section 3406, as amended by section 70432(b)(1) of the OBBBA, to
align the backup withholding threshold for third party network
transactions with the de minimis TPSO reporting threshold under section
6050W.
To the extent a comment, or portion of a comment, was not discussed
in this preamble, the Treasury Department and the IRS determined that
the comment, or portion of the comment, pertained to topics outside of
the scope of these final regulations.
Special Analyses
I. Regulatory Planning and Review
These final regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and OMB regarding review
of tax regulations.
II. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these final regulations will not have a
significant economic impact on a substantial number of small entities.
The final regulations affect any entity required to file information
returns reporting payments of third party network transactions. The
final regulations could affect a substantial number of small entities;
however, the economic impact of the final regulations is not likely to
be significant because the final regulations do not impose any new
requirements on small entities. Rather, the final regulations clarify
the threshold at which entities are required to backup withhold for
reportable payments where certain conditions are met. Because the
threshold to backup withhold on third party network transaction
payments increases under the final regulations, the final regulations
would reduce the frequency with which entities must backup withhold.
Thus, the economic impact of these final regulations is not likely to
be significant.
III. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the OMB
before collecting information from the public, whether that collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the OMB.
The collection of information in these final regulations relates to
recordkeeping and information reporting with respect to backup
withholding in Sec. 31.3406(b)(3)-5. The collected information will be
used by the payor to determine whether payments to the payee exceed a
threshold that would require backup withholding and the issuance of an
information return. The burden for these requirements is included with
the Form and Instructions for Form 945, Annual Return of Withheld
Federal Income Tax. The Form 945 and Instructions for Form 945 are
approved under OMB control number 1545-0029 and the associated burden
is included in the estimates shown in the Instructions for Form 941.
The Form 941 and its instructions were updated in March 2026, and any
decrease in burden associated with the statutory changes to section
3406 is reflected in those instructions because the burden estimates
were based on statutory requirements in effect as of October 1, 2025,
which includes the amendments made by section 70432(b)(1) of the OBBBA.
IV. Submission to Small Business Administration
Pursuant to section 7805(f) of the Code, the proposed regulations
preceding these final regulations were submitted to the Chief Counsel
for the Office of Advocacy of the Small Business Administration for
comment on its impact on small business. No comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These final regulations do not include any Federal mandate
that may result in expenditures by State, local, or Tribal governments,
or by the private sector, in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. These final regulations do not have
federalism implications, do not impose substantial direct compliance
costs on State and local governments, and do not preempt State law
within the meaning of the Executive Order.
VII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
IRS Revenue Rulings, Revenue Procedures, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Printing Office,
[[Page 51394]]
Washington, DC 20402, or by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these final regulations is the Office of
Associate Chief Counsel (Procedure and Administration). However, other
personnel from the Treasury Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
31 as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
0
Paragraph 1. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
0
Par. 2. Section 31.3406(a)-1 is amended by revising paragraphs (a) and
(c), and adding paragraph (e) to read as follows:
Sec. 31.3406(a)-1 Backup withholding requirement on reportable
payments.
(a) Overview. Under section 3406 of the Internal Revenue Code
(Code), a payor must deduct and withhold an amount equal to the product
of the fourth lowest rate of tax applicable under section 1(c) of the
Code and a reportable payment if a condition for withholding exists.
Reportable payments mean interest and dividend payments (as defined in
section 3406(b)(2)) and other reportable payments (as defined in
section 3406(b)(3)). The conditions described in paragraph (b)(1) of
this section apply to all reportable payments, including reportable
interest and dividend payments. The conditions described in paragraph
(b)(2) of this section apply only to reportable interest and dividend
payments.
* * * * *
(c) Exceptions. The requirement to withhold does not apply to
certain de minimis payments as described in Sec. Sec. 31.3406(b)(3)-
1(b)(3), 31.3406(b)(3)-5(b)(2), and 31.3406(b)(4)-1 or to payments
exempt from withholding under Sec. Sec. 31.3406(g)-1 through
31.3406(g)-3.
* * * * *
(e) Applicability date. The provisions of this section apply with
respect to payments made in calendar years beginning after December 31,
2024.
0
Par. 3. Section 31.3406(b)(3)-5 is amended by revising paragraphs (b)
and (e) to read as follows:
Sec. 31.3406(b)(3)-5 Reportable payments of payment card and third
party network transactions.
* * * * *
(b) Amount subject to backup withholding--(1) In general. The
amount described in paragraph (a) of this section that is subject to
withholding under section 3406 is the amount subject to reporting under
section 6050W.
(2) Third party network transactions. In the case of payments made
in settlement of third party network transactions, the amount subject
to withholding under section 3406 is determined with regard to the
exception for de minimis payments by third party settlement
organizations in section 6050W(e). A payment is treated as a reportable
payment under paragraph (a) of this section only if, during the
calendar year, the aggregate number of transactions with respect to the
participating payee exceeds the number of transactions specified in
section 6050W(e)(2) and the aggregate amount of all reportable payment
transactions with respect to such participating payee exceeds the
dollar amount specified in section 6050W(e)(1). 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 section 6050W(e)(2), or the entire amount of the
transaction that causes the total amount paid to the participating
payee to exceed the dollar amount specified in section 6050W(e)(1) at
the time of such payment, whichever occurs later, and the amount of any
subsequent transactions made to the participating payee during the
calendar year.
(3) Exception. Paragraph (b)(2) of this section 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.
(4) Examples. The provisions of this paragraph (b) are illustrated
by the following examples:
(i) Example 1. Platform A is a third party settlement organization
(as defined in Sec. 1.6050W-1(c)(2) of this chapter) and Y is a
participating payee (as defined in Sec. 1.6050W-1(a)(5)(i)(B) of this
chapter). A complies with all the requirements to solicit a taxpayer
identification number (TIN) from Y, but Y does not provide its TIN to
A. During calendar year 2026, A makes 201 payments in settlement of
third party network transactions that total $20,000.01. A must backup
withhold under paragraph (b)(2) of this section on the entire amount of
the 201st transaction because that transaction caused Y to exceed the
de minimis reporting threshold for calendar year 2026 of 200
transactions and $20,000 in gross payments.
(ii) Example 2. The facts are the same as in paragraph (b)(4)(i) of
this section (Example 1). During calendar year 2027, A makes 199
payments in settlement of third party network transactions that total
$18,000.00. A must backup withhold on each payment made to Y in
settlement of a third party network transaction during 2027 under
paragraph (b)(3) of this section because one or more payments in
settlement of third party network transactions made by A to Y during
the preceding calendar year (2026) were reportable payments.
(iii) Example 3. The facts are the same as in paragraph (b)(4)(ii)
of this section (Example 2). During calendar year 2028, A makes four
payments in settlement of third party network transactions that total
$2,000.00. A must backup withhold on each payment made in settlement of
a third party network transaction during 2028 under paragraph (b)(3) of
this section because one or more payments in settlement of third party
network transactions made by A to Y during the preceding calendar year
(2027) were reportable payments.
(iv) Example 4. The facts are the same as in paragraph (b)(4)(iii)
of this section (Example 3). During calendar year 2029, A made no
payments in settlement of third party network transactions, and during
calendar year 2030, A makes 199 payments in settlement of third party
network transactions that total $18,000.00. A is not required to backup
withhold on any payment made in settlement of third party network
transactions during calendar year 2030 because A did not make any
reportable payments to Y during the preceding calendar year (2029), and
A did not make payments in settlement of third party network
transactions that exceed the de minimis reporting threshold.
* * * * *
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(e) Applicability date. The provisions of this section apply with
respect to payments made in calendar years beginning after December 31,
2024.
Frank J. Bisignano,
Chief Executive Officer.
Approved: July 23, 2026.
Kevin M. Salinger,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2026-16269 Filed 8-7-26; 8:45 am]
BILLING CODE 4831-GV-P
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