This blog was last updated on August 19, 2025
The One Big Beautiful Bill (OBBB), signed into law on July 4, 2025, delivers significant relief to third-party settlement organizations (TPSOs) by reverting 1099-K reporting thresholds and fixing critical compliance gaps. For 2025 transactions, TPSOs will need to issue and file 1099-K forms when both criteria are met for a single payee: aggregate payments to that payee equal at least $20,000 in the calendar year AND those payments are made over 200 or more transactions. .
How the OBBB Impacts Third-Party Settlement Organizations (TPSOs)
This change represents a dramatic reduction from the scheduled $600 threshold, significantly decreasing the administrative burden on payment processors and online marketplaces. The legislation also addresses a critical backup withholding gap by retroactively aligning backup withholding requirements under Section 3406 with 1099-K reporting thresholds, eliminating the regulatory confusion that forced TPSOs to navigate conflicting federal requirements.
State-Level 1099-K Thresholds Still in Effect
While the OBBB provides federal relief, state requirements create ongoing challenges that TPSOs must navigate carefully. Several states maintain significantly lower 1099-K reporting thresholds than the new federal requirements. Massachusetts, Virginia, Maryland, DC, and Vermont require 1099-K reporting at $600, while Arkansas maintains a $2,500 threshold. Illinois requires reporting for payments over $1,000 with four or more transactions, and Mississippi requires reporting for any payment over $600. Several states also require backup withholding to be applied to 1099-K payments, following unique withholding rates and requirements. This means that 1099-K reporting would be required to those states no matter the threshold.
The varying state requirements mean TPSOs must maintain dual systems capable of handling both federal and state-specific requirements. Adding complexity, states like Florida, Pennsylvania, and others require direct filing rather than participating in the IRS’s Combined Federal/State Filing Program, necessitating separate compliance processes.
System Updates and Process Adjustments for Tax Year 2025
TPSOs must immediately update their systems to handle the new $20,000 and 200 transaction requirements for 2025 payments. This includes reviewing and auditing state compliance requirements, as they may still differ significantly from federal thresholds. System planning should focus on leveraging reporting platforms that can efficiently handle both federal and state requirements while establishing processes to track changing state requirements independently of federal law.
The Future of 1099-K Reporting
The OBBB provides much-needed stability to the 1099-K reporting landscape for TPSO’s after years of uncertainty. The return to higher federal thresholds does offer significant administrative relief to businesses, but at what cost?
According to IRS tax gap reports over the last 30 years, the lost tax revenue simply from taxpayers not reporting income because they didn’t receive a 1099 is staggering. By reverting to the $20,000/200 transaction threshold, the legislation prioritizes business operational convenience over tax compliance which ultimately contributes to the growing tax gap.
While the OBBB represents a practical solution for TPSOs facing compliance complexity, it essentially trades comprehensive tax reporting for administrative simplicity. State-level complexity remains a key challenge, requiring continued investment in robust compliance systems capable of handling the patchwork of state requirements.
Success will depend on careful attention to both federal changes and ongoing state-level variations, while recognizing that the true cost of this relief may be measured in uncollected tax revenue rather than business savings.
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