The financial planning community is still busily digesting the myriad ways passage of President Donald Trump’s signature tax and spending legislation affects clients across the wealth spectrum, with a lot of consideration being given to major changes such as the permanent extension of the historically high estate tax exemption and the 20% 199A qualified business income deduction.
One topic that's getting less attention is the change made by the One Big Beautiful Bill to tax reporting requirements for contractor payments tied to personal services, gig income and certain vendor payments facilitated via third-party applications like Venmo or PayPal.
Experts say the updates are particularly important for business owners who use contractors, but they can also apply to other clients who pay their nanny, cleaners or other service professionals on the books. Even when the dollar amounts involved aren’t very high, getting the paperwork right can avoid a lot of hassle in the case of an IRS audit.
Form 1099-NEC
An analysis published by the employment law firm Littler breaks down the changes in detail, starting with a review of the rules for reporting payments to “non-employees” for personal services.
Currently, such payments must be reported on an “information return,” commonly called a Form 1099-NEC, if they reach or exceed $600 in a calendar year. Similarly, payments of non-wages, such as for a settlement that includes penalties or emotional distress-type damages, are reportable on Form 1099-MISC if the payment is $600 or more.
Beginning in 2026, Littler reports, the $600 threshold jumps to $2,000, an amount which will then be adjusted for inflation beginning in 2027.
Backup Withholding
Requirements relating to backup withholding — required when the payee fails to provide a valid Form W-4 or Form W-9 using the taxpayer’s correct taxpayer identification number — will similarly be increased to $2,000, according to Littler. This amount is likewise indexed for inflation beginning in 2027.
“While amounts below the new reporting thresholds will still constitute income subject to taxation, an employer will no longer be required to issue a 1099 or engage in backup withholding at the lower amounts,” the analysis explains. “This could significantly reduce the number of 1099s that employers are required to issue.”
Form 1099-K
Another important tax reporting change detailed by Littler addresses third-party network payment reporting, which is required on Form 1099-K. The change affects workers like food vendorsv and hairstylists who receive payments or tips on apps like Venmo or Cash App.
“When such reporting was originally enacted, there was a 'de minimis' exclusion from required reporting if the total amount of such payments was less than $20,000 and involved fewer than 200 transactions,” the report notes. “The American Rescue Plan Act of 2021 eliminated the transaction requirement entirely and reduced the reporting threshold to $600.”
These changes originally intended to take effect in 2022, according to the report, but the IRS has repeatedly delayed implementation. Prior to passage of the OBBB, IRS leaders had said they would start imposing a $2,500 threshold for 2025.
The new law reinstates the $20,000 and 200 transactions thresholds for required reporting, retroactive to 2022. It also applies these standards to backup withholding requirements, effective for 2025.
The Big Takeaway
Overall, the Littler report suggests, these adjustments appear to be good news for employers and businesses that regularly make such payments.
“They should substantially reduce their administrative burdens, particularly with respect to payments made to independent contractors,” the report concludes.
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