For years, it was the rule every accounts payable team knew without thinking: pay a contractor $600 or more, issue a 1099-NEC. That rule no longer applies starting in 2026.
And the transition between the old threshold and the new one is exactly where compliance mistakes are made.
If your business pays independent contractors — whether it's one person or a hundred — this change affects your bookkeeping workflows, your reporting obligations, and your IRS exposure. Right now.
What Exactly Changed and When
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, raised the reporting threshold for Form 1099-NEC and Form 1099-MISC from $600 to $2,000, effective for tax year 2026.
$600 threshold still applies — report all contractors paid $600+
New $2,000 threshold — only contractors paid $2,000+ require a 1099-NEC
$2,000 threshold indexed for inflation and adjusted annually
Backup withholding requirements have also been updated to match. Withholding is now only triggered when total payments exceed $2,000, consistent with the new reporting floor.
Why the Transition Year Is the Highest-Risk Period
Most accounting systems, payroll platforms, and vendor management workflows are configured once and left alone. That's where the risk lives in 2025–2026.
If your system is still flagging contractors at $600, it will over-report your 2026 obligations, creating administrative inefficiency.
If someone updated the system prematurely and it's already set to $2,000, it will under-report your 2025 obligations — and that is an IRS compliance issue.
Neither misconfiguration is immediately obvious, and both surface at the worst possible time: reporting season. The $2,000 threshold is not retroactive. Your system needs to apply the old rule to 2025 payments and the new rule to 2026 payments simultaneously.
1099-NEC vs. 1099-K: The Confusion Most Businesses Walk Into
Form 1099-K covers payments processed through third-party networks including PayPal, Stripe, Square, Venmo for Business, and online marketplaces.
The OBBBA reinstated the original $20,000 and 200-transaction threshold for 1099-K reporting, permanently reversing the proposed $600 threshold.
If you pay contractors primarily through Stripe or PayPal, those platforms may not issue a 1099-K because the transaction volume does not reach the threshold.
However, your business may still owe a 1099-NEC because these are separate reporting systems.
A platform not issuing a 1099-K does not exempt your business from issuing a 1099-NEC when required.
A $3,000 Stripe payment to a contractor in 2026 may generate no 1099-K, but your business would still owe a 1099-NEC. The IRS matches these independently.
The Worker Classification Risk That Doesn't Go Away
The higher reporting threshold reduces paperwork. It does not reduce IRS scrutiny of worker classification.
Paying someone as a contractor when they function as an employee remains one of the highest-risk areas in US tax compliance.
The IRS evaluates:
- Behavioral control
- Financial control
- The nature of the relationship
A business that misclassifies employees as contractors can face retroactive payroll taxes, penalties, and interest regardless of whether a 1099 was issued.
Three Actions to Take Before 2026 Reporting Season
1. Audit your 2025 vendor list now.
Identify every contractor paid $600 or more and determine whether payments were made through direct transfers or third-party platforms.
2. Update your accounting system carefully.
Apply the $2,000 threshold only to payments made on or after January 1, 2026 while preserving $600 tracking for 2025.
3. Map your payment routing.
Document which payments flow through Stripe, PayPal, bank transfers, checks, or other channels so you understand where 1099-K and 1099-NEC obligations overlap.
The paperwork reduction is real — but only for businesses that manage the transition year correctly.