TITLE: Backup Withholding on Third-Party Network Transactions: What International Sellers Must Know
The IRS and Treasury have finalized new backup withholding regulations for third-party network transactions. The change matters if your UK or international business receives US-related ecommerce payments through platforms such as PayPal, Venmo, or similar payment networks.
The rules restore the $20,000 and 200-transaction thresholds for many third-party settlement organizations. However, the lookback rule can still trigger withholding from your first payment of the following year.
Act now: understand the rule change
Treasury Decision 10053, titled Backup Withholding on Third Party Network Transactions, adopts the January 2026 proposed regulations without change.
The final rule was filed on 7 August 2026 and published in the Federal Register on 10 August 2026. It became effective on 10 August 2026.
The regulations apply to payments made in calendar years beginning after 31 December 2024. This means they apply to payments made from 2025 onwards.
The rules reflect changes made by the One Big Beautiful Bill Act to Internal Revenue Code Section 3406.
Check both thresholds before withholding starts
A third-party settlement organisation, or TPSO, generally does not need to apply backup withholding to third-party network payments unless both conditions are met during the calendar year:
- Gross reportable payments to the payee exceed $20,000.
- The number of reportable transactions exceeds 200.
These are the same thresholds now used for Form 1099-K reporting for third-party network transactions.
The conditions are cumulative. Crossing only one threshold does not normally activate the de minimis rule for that year.
However, the timing of the trigger is important.
Withhold from the transaction that crosses the threshold
The platform must apply backup withholding to:
- The entire transaction that causes the payee to exceed the relevant threshold later in time.
- Every subsequent transaction paid to that payee during the same calendar year.
This is not limited to the amount above $20,000. The entire triggering payment can be subject to withholding.
Federal Register Example 1
The final regulations provide this example:
- Platform A makes 201 payments to a payee during 2026.
- The payments total $20,000.01.
- The payee has not supplied the required taxpayer identification number.
- The 201st payment causes the transaction count to exceed 200 and the payment total to exceed $20,000.
Platform A must apply backup withholding to the entire 201st transaction and to later transactions during 2026.
This example assumes the payee is otherwise subject to backup withholding. A properly documented foreign payee may be treated differently, as explained below.
Do not miss the lookback rule
The most important operational point is the preceding-year lookback rule.
If one or more payments to the payee were reportable third-party network payments in the preceding calendar year, the de minimis exception does not apply in the current year.
As a result, backup withholding can apply from the first payment of the current year, even if the payee has fewer than 200 transactions and receives less than $20,000.
Federal Register Example 2
The regulations provide the following example:
- In 2026, the platform made reportable payments to the payee.
- In 2027, the platform makes 199 payments totalling $18,000.
- The 2027 payments are below both thresholds.
Backup withholding still applies to each 2027 payment because the platform made reportable payments to the payee during 2026.
This creates a year-to-year compliance link. You must review the previous year’s platform reporting status before assuming that the current year’s totals are below the threshold.
Apply the correct rate: 24% is backup withholding
The backup withholding rate under Section 3406 is a flat 24%.
For example, if a payment platform processes a $1,000 payment that is subject to backup withholding, it may withhold $240 and pay the remaining $760, subject to the platform’s treatment and reporting process.
Backup withholding is generally a prepayment of federal income tax. If it is shown on your information return, you may generally claim it as federal income tax withheld on the relevant tax return.
The IRS confirms the 24% rate in Topic No. 307, Backup Withholding.
Give foreign-status documentation to the platform
International sellers should not automatically complete Form W-9.
A foreign individual will generally provide Form W-8BEN. A foreign company or other foreign entity will generally provide Form W-8BEN-E when requested by the payment platform or withholding agent.
These forms document non-US status. Where the platform can rely on valid documentation and the applicable payment rules are satisfied, the payee may not be treated as a US person for Form 1099-K and backup withholding purposes.
The IRS states that:
- Form W-8BEN is used by foreign individuals.
- Form W-8BEN-E is used by foreign entities.
Keep the documentation current. Review it when your legal entity, address, ownership, tax status, or payment arrangements change. Missing, expired, incomplete, or invalid documentation can cause a platform to apply the wrong withholding treatment.
Separate 24% backup withholding from 30% foreign withholding
Do not confuse backup withholding with chapter 3 or chapter 4 withholding.
- Backup withholding: generally 24%, usually connected with US payee identification and certification issues.
- Foreign-person withholding: commonly 30% on certain US-source fixed or determinable annual or periodical income, unless a treaty or another exception reduces the rate.
The 30% rate is not the backup withholding rate.
A valid W-8 form documents foreign status. It does not automatically eliminate every possible US withholding obligation. The payment type, source, entity status, treaty position, and platform classification still matter.
For that reason, review your platform account classification and withholding statements together. Do not rely only on the percentage shown on a payment statement.
Continue reporting all income
The absence of Form 1099-K does not make income non-taxable.
The preamble to T.D. 10053 expressly confirms that the taxability of income and your obligation to report income are not determined by:
- Whether you receive Form 1099-K.
- Whether the platform files Form 1099-K.
- Whether backup withholding applies.
- Whether your payments remain below the reporting thresholds.
You must continue recording and reporting your gross business income under the rules applicable to your entity and activities.
The thresholds are reporting and withholding rules. They are not a tax-free allowance.
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