The massive tax law signed earlier this year—the One Big Beautiful Bill Act (OBBBA)—eases payroll responsibilities for many smaller business operations. The changes take effect in 2026. In addition, the OBBBA finally resolves tax reporting issues involving payments from third party settlement organizations (TPSOs) like Zelle, Venmo, and PayPal.
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
Background: The IRS requires employers to report payments made to independent contractors on Form 1099-NEC, Nonemployee Compensation, when the annual total exceeds $600. (In the past, these payments were reported on Form 1099-MISC.) For instance, a Form 1099-NEC is required if an employer pays a freelance consultant $5,000 for five sessions. Employers must send a copy reporting the payments to both the recipient and the IRS.
It must seem like the annual threshold of $600 has been in place forever to long-time payroll managers and CPAs. In fact, it hasn’t budged an inch since 1954!
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If a firm fails to meet its reporting responsibilities, it may be fined $310 for each violation in 2025. The penalty is hiked to $660 per form if the omission is intentional. To add insult to injury, this may also draw more attention to employers over classification of employees as independent contractors.
Now, at last, the OBBBA raises the threshold. Beginning in 2026, Form 1099-NEC reporting is required only if total payments to an independent contractor exceed $2,000. Furthermore, the $2,000 threshold will be indexed for inflation in subsequent years. Note: The new law also raises the threshold for 24% “backup withholding” from $600 to $2,000 if an independent contractor fails to provide valid information on Form W-9, Request for Taxpayer Identification Number and Certification.
Similarly, independent contractors and other businesses—especially those in the “gig economy”—are often paid through TPSOs during the year. The IRS initially required TPSOs to report the payments on Form 1099-K, Payment Card and Third-Party Network Transactions, if the recipient earned more than $200,000 through more than 200 business transactions. But the American Rescue Plan Act (ARPA) lowered the threshold for filing 1099-Ks to just $600, the same as the previous 1099-NEC threshold, regardless of the number of annual transactions.
After backlash from the public, however, the IRS postponed the effective date for this lower threshold and eventually created a three-year phase-in using a limit of $5,000 in 2024;
$2,500 in 2025; and $600 in 2026 and thereafter. Now the OBBBA renders this provision obsolete.
Under the new law, the change won’t ever take effect. The law reverts to the previous set of rules based on a $600 threshold and 200 business transactions. It’s as if the ARPA change never occurred.
Of course, business owners may also have to report payments to independent contractors to their state taxing authorities. The rules vary state to state. In some cases, states follow the federal rules while other go their own way.
Best approach: Coordinate payroll responsibilities for clients who rely on your expertise for this function. Make sure that accurate processes and procedures are in place well ahead of the coming year.
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