If your business pays contractors or uses payment apps like PayPal or Venmo, there are major IRS reporting changes you need to know about. The One Big Beautiful Bill Act (OBBBA) changed the 1099 reporting rules, raising the income thresholds and reducing the number of forms most businesses will need to file.
Here’s a breakdown of what’s changing and how it impacts your reporting starting in 2026.
Form 1099-NEC: Paying Independent Contractors
When you pay an independent contractor $600 or more during the year by cash, check, or direct deposit, you must file Form 1099-NEC with the IRS. This form reports how much you paid for business-related services.
You must also file a 1099-NEC for payments of $600 or more made to attorneys and physicians, even if their businesses are incorporated.
Penalties for Not Filing
Failing to file can be expensive:
- $310 per form if you file late or forget.
- At least $660 per form (or 10% of the payment) if the IRS determines you intentionally ignored the rule.
You could also face additional penalties if the IRS finds you misclassified a worker as an independent contractor rather than an employee.
New 1099 Report Rules
The $600 reporting threshold has been in place since 1954—and it’s finally being updated.
- Starting in 2026, the new filing threshold rises to $2,000.
- Beginning in 2027, this amount will automatically adjust for inflation in $100 increments.
This change will save time and reduce paperwork for many small businesses.
The new $2,000 threshold also applies to backup withholding (the 24% tax withholding required when a contractor doesn’t provide a valid taxpayer identification number).
Exception: Payments Made Through Third-Party Platforms
If you pay a contractor through a third-party payment service—like PayPal, Venmo, or by credit card—you don’t need to file a 1099-NEC.
Those payments are instead reported by the payment processor using Form 1099-K, which is up next.
Form 1099-K: Payments from Third-Party Platforms
Form 1099-K reports payments handled by third-party settlement organizations (TPSOs) and payment card processors.
These include platforms like:
- PayPal, Venmo, CashApp
- eBay, Amazon, Etsy
- Uber, Airbnb, Upwork, TaskRabbit
- BitPay and other crypto processors
- TicketMaster and crowdfunding sites
How We Got Here
Originally, TPSOs only had to file a 1099-K if:
- The payee received over $20,000, and
- Completed more than 200 transactions in a year.
In 2021, Congress tried to lower that to $600 for all users, but after strong backlash from taxpayers, businesses, and payment platforms, the IRS delayed it several times.
Temporary thresholds were set at $5,000 for 2024 and $2,500 for 2025, but those have now been replaced.
New 1099 Reporting Rules under OBBBA
The OBBBA permanently reverses the $600 rule.
This change is retroactive to 2021, which means:
- No 1099-Ks are required for 2024 or earlier unless both thresholds were met.
- The previously planned $2,500 rule for 2025 no longer applies.
Why It Matters
If you pay contractors through PayPal or another TPSO, you don’t file a 1099-NEC.
However, if the contractor doesn’t meet the 1099-K thresholds, no report is sent to the IRS at all.
While taxpayers are still legally required to report all income, the IRS estimates that 55% of unreported income comes from payments that aren’t backed by a 1099 form. When a 1099 is issued, only 6% of income goes unreported. I’d say that’s a big difference in compliance.
State 1099-K Rules May Differ
Some states have set their own lower thresholds for 1099-K reporting. If you operate in one of these states, you may still need to file forms even if you’re under the federal limit.
| State | 1099-K Threshold |
|---|---|
| Arkansas | $2,500 |
| District of Columbia | $600 |
| Illinois | $1,000 and 4+ transactions |
| Maryland | $600 |
| Massachusetts | $600 |
| Montana | $600 |
| New Jersey | $1,000 |
| North Carolina | $600 |
| Rhode Island | $100 |
| Vermont | $600 |
| Virginia | $600 |
It’s not yet clear whether these states will update their rules to match the OBBBA’s federal thresholds.
Form 1099-MISC: Other Income
Form 1099-MISC is used to report non-employee payments such as:
- Rent
- Prizes and awards
- Legal settlements
Starting in 2026, this form will also use the new $2,000 threshold, with future inflation adjustments.
Key Takeaways
Starting in 2026:
The 1099-NEC and 1099-MISC thresholds rise to $2,000 and will adjust for inflation.
Third-party payment apps (PayPal, Venmo, etc.):
A 1099-K is required only if the payee exceeds $20,000 and 200 transactions per year.
State rules may differ:
Check local filing requirements if your business operates in multiple states.
