Proposed Regulations Update Backup Withholding Thresholds

Listen to or watch the related podcast: https://podcasts.dinesenmedia.com/show/information-return-intelligence-1/treasury-aligns-backup-withholding-with-new-1099-reporting-thresholds/

The Treasury Department recently released proposed regulations to update backup withholding thresholds to conform with the increased reporting thresholds for many 1099’able transactions.

Background

The One Big Beautiful Bill Act (OBBBA) changed sections 6041 and 6041A to increase the reporting threshold from our old, familiar $600 threshold to $2,000. This amount will be adjusted for inflation each year. 

The requirement to backup withhold in certain situations comes from section 3406. Regulations under section 3406 – specifically 31.3406(b)(3)-1 – still reference $600.

The proposed regulations would update this regulation to reference the wording to “the dollar amount in effect for such calendar year under section 6041(a).”

Practical Implication

This affects AP departments and other issuers of 1099s by changing the level at which backup withholding applies. 

First, when does backup withholding apply? For most typical situations you’ll deal with, it’s when you make a reportable payment (one that will end up on a 1099) and you don’t have your recipient’s TIN.

Example: You pay That Guy $500 as an independent contractor. You don’t have his TIN at the time you make the payment. While you need to fix this problem, you haven’t violated anything yet because $500 is below the reporting threshold. If this is all you pay him for the year, you’ll never issue him a 1099, so there is no problem. No backup withholding is required.

Example: Continuing the prior example, let’s say you pay him $2,000 later in the year. You’ve now paid him $2,500 for the year. If you still don’t have his TIN, you’ll need to do backup withholding.

Crossing the Threshold

Let’s look more closely at the second example, of paying $2,500 to That Guy. You had previously paid him $500, and now you’ve paid him another $2,000, putting you past the reporting threshold. Do you backup withhold on $2,500, $2,000, or $500?

The answer is, withhold on the entire amount of the payment that puts you past the threshold – so, in this case, $2,000.

The citation here is 31.3406(b)(3)-1(b)(3)(i): “The amount subject to withholding is the entire amount of the payment that causes the total amount paid to the payee to equal $600* or more and the amount of any subsequent payments made to the payee during the calendar year.”

*IMPORTANT NOTE: The official regulation still says $600, but the whole point of this article is that there are proposed regulations to change this to $2,000.

So, backup withhold on $2,000, and continue to backup withhold on future payments until That Guy gives you his TIN.