Backup Withholding & Third-Party Payments in 2026: What the New Rules Mean for Online Businesses, Creators, and Professionals
As more income flows through payment apps, online marketplaces, and third-party platforms, understanding how backup withholding and Form 1099-K reporting works has become essential—especially for online businesses, creators, and high-income professionals.
Recent proposed regulations issued by the Treasury Department and the IRS, reflecting changes from the One, Big, Beautiful Bill (OBBB), clarify when third-party settlement organizations (such as payment apps and online platforms) are required to apply backup withholding. While these rules provide relief from unnecessary withholding, they also highlight a critical point many taxpayers overlook: income is still taxable, even if no withholding or reporting occurs.
At Velin & Associates, Inc., we help clients proactively manage these rules to avoid cash flow disruptions, IRS notices, and compliance surprises.
What Is Backup Withholding—and Why It Matters
Backup withholding is a federal tax mechanism that requires payers to withhold tax (currently 24%) from certain payments when the IRS believes there is a higher risk of underreporting. This often occurs when:
- A taxpayer has not provided a valid taxpayer identification number (TIN)
- The IRS has notified the payer of incorrect information
- Certain reporting requirements are not met
For businesses and individuals receiving payments through third-party payment networks, backup withholding can significantly impact cash flow if triggered unexpectedly.
What Changed Under the One, Big, Beautiful Bill
Under the new proposed regulations, third-party settlement organizations are generally NOT required to apply backup withholding unless BOTH of the following thresholds are exceeded:
- More than $20,000 in gross payments, AND
- More than 200 transactions during the year
This aligns backup withholding rules with the Form 1099-K reporting thresholds, which reverted to the pre-2021 standard after changes enacted under OBBB.
Important: These thresholds only determine when reporting and withholding apply. They do not determine whether income is taxable.
Why This Matters for Our Clients
Many of our clients—especially YouTubers, TikTok creators, Shopify store owners, Amazon sellers, doctors, dentists, and high-net-worth individuals—receive income from multiple platforms. Some of that income may fall below reporting thresholds but is still fully taxable.
Without proper tracking and reconciliation, this gap can lead to underreporting, penalties, or audit exposure.
Examples:
YouTubers & Content Creators
When a YouTuber earns income from ad revenue, brand sponsorships, and affiliate links across multiple platforms, some payments may not trigger Form 1099-K reporting because they fall below the threshold. By reconciling platform statements early, we could ensure all income is properly reported—helping avoid underreporting and potential IRS penalties.
Relevant for: CPA for YouTubers | CPA for TikTokers | CPA for Creators
Shopify & Online Commerce Businesses
When a Shopify store owner processes sales through multiple payment processors, none may individually exceed the Form 1099-K threshold, even though the combined income is substantial. In these cases, we could implement clean bookkeeping and centralized income tracking so the client remains compliant while minimizing the risk of unnecessary backup withholding.
Relevant for: CPA for Shopify Store | Shopify Store CPA | Online Commerce CPA
Amazon Business Owners
When an Amazon business owner sells across multiple marketplaces, proper TIN matching and accurate reporting can help prevent backup withholding. By reconciling income on a monthly basis, we could help ensure there are no surprises—even if no Form 1099-K is issued.
Relevant for: CPA for Amazon Business | Amazon Business CPA
Medical & Dental Practices
When a dental practice accepts digital payments for certain services, questions may arise around reporting thresholds and compliance. We could review payment flows, confirm proper income reporting, and help prevent unnecessary withholding—while maintaining thorough documentation in case of an audit.
Relevant for: CPA for Dental Practice | Dentist CPA | CPA for Doctors | CPA for Medical Practice
High Net Worth Individuals
When a high-net-worth individual receives consulting or investment-related payments through third-party networks that do not trigger reporting, proactive tracking becomes essential. By monitoring income sources throughout the year, we could help prevent discrepancies that might otherwise raise red flags during IRS matching.
Relevant for: CPA for High Net Worth Individuals
Key Takeaway: Reporting Thresholds Do NOT Equal Tax-Free Income
One of the most common misconceptions we see is the belief that:
“If I didn’t get a 1099-K, I don’t need to report it.”
That is incorrect.
The IRS has been clear: backup withholding and reporting thresholds do not change whether income is taxable. This is why proactive planning, proper bookkeeping, and professional tax guidance are essential—especially for businesses and individuals with multiple income streams.
How Velin & Associates, Inc. Helps Clients Stay Ahead
We help our clients by:
- Reconciling income across platforms before filing season
- Preventing unnecessary backup withholding
- Ensuring proper taxpayer identification and documentation
- Reducing audit risk through clean, defensible reporting
- Aligning tax strategy with long-term business and wealth goals
Whether you are a creator, online seller, medical professional, or managing complex income sources, early planning makes all the difference. For more information about our tax planning services, contact us today: visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
CPA for YouTubers | CPA for Shopify Store | CPA for Online Commerce | CPA for Creators | Shopify Store CPA | CPA for Filmmakers | CPA for Amazon Business | Amazon Business CPA | CPA for Dental Practice | Dentist CPA | Dental Business CPA | Online Commerce CPA | CPA for TikTokers | CPA for Doctors | CPA for Medical Practice | CPA for High Net Worth Individuals
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.