Summary
This post explains the 1099 threshold increase from $600 to $2,000 under Section 70433 of the One Big Beautiful Bill Act, effective for payments made after December 31, 2025. It covers three things the change did not affect: worker-classification exposure, the ongoing need to collect Form W-9 information at the start of a contractor relationship, and Alabama's separate state information-return filing rules. It closes with a practical checklist for reviewing contractor relationships and a CTA to book a strategy session.
By: Jordan Gerheim, CEO – Outside Chief Legal LLC
The federal reporting threshold for certain Forms 1099-NEC and 1099-MISC increased from $600 to $2,000 for payments made after December 31, 2025. As a result, many contractor payments made in 2026 will not require a Form 1099 in early 2027.
That reduces paperwork. It does not reduce the legal importance of three related issues: properly classifying workers, collecting Form W-9 information, and understanding the state reporting rules that may apply to your business.
Section 70433 of the One Big Beautiful Bill Act increased the reporting threshold for Forms 1099-NEC and certain Forms 1099-MISC from $600 to $2,000. The threshold may be adjusted for inflation beginning in calendar year 2027. The law also increased the related backup-withholding threshold for affected payments.
The change may mean fewer forms during the next filing season. It does not mean a business can treat a worker differently, stop collecting basic tax information, or assume that its state filing obligations have changed.
Risk 1: Worker-classification exposure is unchanged
Worker classification is separate from information reporting.
Whether a worker is properly treated as an independent contractor instead of an employee depends on the facts of the working relationship. Common considerations can include how much control the business exercises over the work, who supplies tools and equipment, who sets the work schedule, whether the worker has an opportunity for profit or loss, whether the worker serves other clients, how long the relationship lasts, and how central the work is to the business.
Different agencies and courts may apply different legal standards and weigh facts differently. That is why classification is rarely a question that can be resolved safely by a title, a contract label, or a tax form alone.
The new 1099 threshold does not change that analysis.
A business that pays six contractors $1,200 each during 2026 may not be required to issue six federal Forms 1099-NEC under the new threshold, assuming the payments otherwise fall within the categories covered by the increased reporting rule. The relationships themselves have not changed. Neither has the potential exposure if one or more workers should have been classified as employees.
What may change is visibility. When a business issued Forms 1099 for smaller contractor payments, the forms created a year-end record that made contractor relationships easier to identify and review. With fewer forms required, a business may be less likely to notice patterns in its own workforce.
A classification issue that is not visible on a year-end reporting list is still a classification issue. It is simply one the business may be less likely to identify before someone else does.
Risk 2: The reason to collect Form W-9 information has not changed
A higher reporting threshold is not a reason to stop collecting Form W-9 information from contractors.
A business often does not know in January what a contractor relationship will look like by December. A $400 project can become a $2,500 relationship after an additional assignment, expanded scope, or new project. Collecting the Form W-9 at the beginning of the relationship is straightforward. Trying to obtain a taxpayer identification number from a contractor months after the work is complete is often more difficult.
The IRS states that the reporting and backup-withholding threshold for certain payments increased to $2,000 for tax years beginning after 2025. The backup-withholding rate itself remains 24 percent.
Collecting a completed Form W-9 before payment helps the business obtain the contractor’s legal name, taxpayer identification number, federal tax classification, and certification information. It also helps establish a reliable process if the contractor’s payments later cross the reporting threshold or if the business needs to address a backup-withholding issue.
The practical rule remains simple: collect the Form W-9 at the start of the contractor relationship, not during year-end cleanup.
Risk 3: State filing rules may not match the federal threshold
The federal reporting change does not automatically change state filing obligations.
For Alabama, the Department of Revenue provides separate instructions for 1099 information returns depending on whether Alabama income tax was withheld. When Alabama tax was not withheld, the Department states that copies of information returns must generally be filed with ALDOR by March 15 following the end of the year. The Department also permits payers to participate in the Combined Federal/State Filing Program if no Alabama income tax was withheld.
If Alabama income tax was withheld, reporting is handled through My Alabama Taxes and requires different forms, procedures, and deadlines. The Alabama Department of Revenue also notes that a payer that voluntarily withholds Alabama income tax from non-wage payments may not use the Combined Federal/State Filing Program.
The interaction between Alabama’s filing requirements and the new $2,000 federal threshold should be confirmed with a tax professional or counsel based on the business’s specific payments, withholding practices, and filing method. A business should not assume that “no federal form” always means “no state filing obligation.”
Florida presents a different analysis because Florida does not impose a state individual income tax. Even so, businesses that operate in more than one state should not assume a single reporting process covers every location where they make contractor payments or have reporting obligations.
If your business pays contractors outside Alabama or Florida, review the applicable state requirements. State information-reporting rules were not automatically changed by the federal increase in the 1099 threshold.
Use the reduced paperwork to review contractor relationships
Fewer Forms 1099 may create a modest administrative benefit during the next filing season. That time is better spent reviewing the contractor relationships that deserve attention.
Start with the list of people and businesses your company has paid as contractors this year, including those who may not reach $2,000 in total payments. Confirm that you have a current Form W-9 for each contractor.
Then look more closely at longstanding contractor relationships. Pay particular attention to individuals who work set hours, use company equipment, work primarily or exclusively for your business, follow detailed direction from your managers, or perform services that are central to the company’s business.
None of those facts alone determines classification. Together, however, they can identify relationships that deserve a closer review.
It is generally better to assess a contractor relationship during an ordinary business month than to revisit it after a wage claim, unemployment claim, tax inquiry, workers’ compensation issue, or dispute with the worker.
The reporting change is also not a change in what counts as taxable income. A contractor paid $1,500 generally must still report that income, whether or not the business issues a Form 1099. Likewise, the business’s ability to claim its own deduction depends on its records and applicable tax rules, not simply on whether a Form 1099 was required.
Frequently asked questions
What is the new 1099 threshold for 2026?
For payments made after December 31, 2025, the reporting threshold for certain Forms 1099-NEC and 1099-MISC increased from $600 to $2,000. The threshold may be adjusted for inflation beginning in calendar year 2027. The first filing season affected by the change will be early 2027, when businesses report qualifying payments made during 2026.
Do I still need a Form W-9 from a contractor I expect to pay less than $2,000?
As a practical business matter, yes. A contractor relationship can grow during the year, and collecting the Form W-9 at the beginning of the relationship gives the business the taxpayer-identification information it may need for reporting, backup withholding, and recordkeeping.
Does the higher 1099 threshold change whether my worker is an employee or an independent contractor?
No. Worker classification depends on the substance of the relationship, not on whether a Form 1099 is required. The reporting threshold affects information reporting. It does not change the legal tests used to determine whether a worker should be treated as an employee or contractor.
Does Alabama follow the $2,000 federal threshold?
Businesses should not assume that Alabama’s information-return filing requirements automatically follow the federal threshold. Alabama has separate filing procedures depending on whether Alabama income tax was withheld, and the Department of Revenue permits Combined Federal/State Filing Program participation in some circumstances. Review the current Alabama requirements with a tax professional or counsel based on your specific facts.
If my contractor does not receive a Form 1099, do they still owe tax on the payment?
Generally, yes. Whether a Form 1099 is issued is separate from whether income must be reported for tax purposes. A contractor’s obligation to report taxable income does not depend on receiving a federal information return.
Review the relationship, not only the form
If fewer Forms 1099 have you looking at your contractor arrangements for the first time in a while, that is a useful instinct.
The reporting threshold has changed. The need for careful classification, complete records, and a consistent contractor-onboarding process has not.
Schedule a Risk-Free Strategy Session with Outside Chief Legal to discuss how your contractor relationships are structured and what practical steps may help your business reduce avoidable risk.
This article provides general information only and is not legal or tax advice.
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