New 1099-NEC Threshold 2026: What to Do Before Year-End

The $600 federal reporting threshold behind Form 1099-NEC had stood unchanged since the 1954 tax code and was never indexed for inflation, which means businesses spent decades filing information returns on increasingly routine, low-dollar payments.

That changed on July 4, 2025, when the One Big Beautiful Bill Act (OBBBA) was signed into law, raising the threshold for Form 1099-NEC and Form 1099-MISC from $600 to $2,000 for all payments made on or after January 1, 2026.

For finance and HR leaders running mid-market or enterprise contractor rosters, the new 1099-NEC threshold is welcome news in terms of less paperwork. But the operational reality is more complicated than the headline suggests.

Most payroll systems, AP workflows, and contractor management processes are still built around the $600 threshold. Not every state has conformed to the new federal threshold, meaning a contractor may still trigger a state-level filing obligation even though no federal 1099-NEC is required. Additionally, the threshold change does not excuse misclassification risk. A contractor paid $1,800 carries the same classification exposure as a contractor paid $60,000.

In this article, we’ll cover what this threshold means for businesses, how to maintain federal and state compliance, and practical action items to take to ensure filing accuracy at year-end.

What the OBBBA actually changed for 1099-NEC filers

The new $2,000 threshold applies to payments made to independent contractors after December 31, 2025. The first 1099s filed under the new rules will cover the 2026 tax year and will be due in early 2027.

Here are a few key points about the change to keep in mind:

• The threshold is per contractor, per year: A vendor paid $700 in March and $1,400 in October has crossed the $2,000 line and still requires a 1099-NEC

• 2025 payments still use the $600 threshold: The new rule applies only to payments made in 2026

• Other 1099 forms are unaffected: The $2,000 threshold applies only to 1099-NEC and 1099-MISC. Other forms such as 1099-INT, 1099-DIV, 1099-R, and 1099-K maintain their own separate thresholds.

For a company with a large pool of short-term freelancers and project-based consultants, the filing volume reduction can be significant. A 50-vendor contractor list with payments averaging $1,200 could see federal 1099 filings drop to a fraction of the prior-year count. While the relief is real, the compliance work that remains is equally significant.

Misclassification risk does not disappear at $1,999

Although the threshold change reduces your 1099-NEC filing paperwork, it does not change the legal test for whether a worker is correctly classified as an independent contractor.

Worker classification is determined by control and economic dependence, not by payment amount. A contractor who works exclusively for your organization, on your equipment, on a fixed schedule, at a supervisor-set pace, may be an employee under that analysis, regardless of whether they are paid $800 or $80,000.

There is an additional risk layered into the new threshold. When payments fall between $600 and $1,999, there is no required 1099 form to trigger a review. That can make it easier to unintentionally overlook classification issues in lower-spend contractor relationships until they compound into something more serious.

The financial exposure from misclassification is substantial. When the Internal Revenue Service (IRS) or Department of Labor (DOL) determines that a worker classified as a 1099 contractor should have been a W-2 employee, the business becomes liable for back taxes, penalties, interest, and potentially unpaid overtime.

Federal vs. state compliance

States set their own 1099 reporting rules. Many mirror the federal rules, with variations in thresholds, timing, sourcing, and extensions. Some collect information returns through the IRS Combined Federal/State Filing (CF/SF) Program, while others require direct filing. Even though the OBBBA raised the federal threshold, it did not automatically change state thresholds. Some states have not yet aligned to the OBBBA changes affecting Form 1099-NEC and Form 1099-MISC for tax year 2026.

For finance leaders, the practical implication is that year-end contractor data must be segmented not just by total payment amount, but by state of operation. Additionally, state rules need to be verified individually, because they are changing at different rates.

See also: How to Overcome Multi-State Payroll Challenges with the Right Software

W-9 collection vs. 1099-NEC threshold changes

One of the most common errors emerging after the threshold change is the assumption that fewer required 1099 forms means fewer required W-9 forms. However, this is not the case, and operating from this assumption creates real compliance risk.

The threshold change affects 1099-NEC filing obligations, but it does not alter when a business is required to collect a W-9. There is no IRS rule that ties W-9 collection to a dollar threshold, so W-9 collection must continue at contractor onboarding, regardless of expected payment volume.

The practical reason for maintaining W-9 collection at onboarding is timing. At the point of the first payment, the payer does not know whether total payments for the year will reach $2,000. A contractor onboarded in January for a $1,200 project may be brought back in June for an additional project that pushes the total above the threshold. Without a W-9 on file at that point, backup withholding at 24% applies to future payments, and the company has no documentation of good-faith compliance to present in the event of an audit.

Even when payments stay under $2,000, having a W-9 on file protects the business if the IRS later flags a TIN mismatch. Maintain W-9 collection as a vendor onboarding requirement, not a threshold-triggered one.

Strategies for ensuring compliance at year-end

The new $2,000 threshold reduces filing volume, but sound year-end compliance is about more than a shorter filing list. Below are practical action items to work through before December 31 to maintain compliant contractor management.

Re-segment your contractor roster by payment tier

Your current vendor and contractor lists are likely still organized around the $600 threshold. That segmentation is now misaligned with the federal threshold, and it may also be misaligned with the state thresholds applicable to your specific contractor locations.

Sort your active 2026 contractor roster into three tiers:

• $2,000 and above (federal filing required): These contractors need a 1099-NEC filed with the IRS. Confirm that a completed, current W-9 is on file for each one. Verify the entity type from the W-9. C-corps and S-corps are generally exempt from 1099-NEC reporting, with specific exceptions for attorneys and healthcare providers.

• Between the applicable state threshold and $2,000 (state filing may be required): These contractors fall below the federal threshold but may trigger a state-level obligation depending on where they operate. Cross-reference each contractor’s state to see whether they’ve implemented the federal threshold or whether there’s a distinct state threshold to follow.

• Below all applicable thresholds (no filing required): These contractors are below both the federal and any relevant state threshold. No 1099-NEC is required, but internal records of payment should still be maintained for audit purposes.

Update your payroll and accounting system thresholds

If your bookkeeping or payroll software automatically flags contractors for 1099 issuance at $600, that trigger needs to be updated to $2,000 for the 2026 tax year.

Check the following settings in your systems:

• The contractor payment tracking threshold that triggers 1099 flagging

• Any automatic suppression of W-9 collection below a payment threshold (this should remain active at first payment, regardless of expected total)

• The state-level filing rules configured for each state where your contractors operate

Send proactive communications to contractors

Contractors who received between $600 and $1,999 from your organization in 2026 will not receive a 1099-NEC from the company. They may be expecting one, particularly if they worked with the company in prior years and received a form then.

This creates a downstream problem. Contractors who do not receive an expected 1099-NEC may under-report their income, contact your AP team for a missing form, or file an SS-8 with the IRS disputing their classification. Any of these actions generates administrative overhead and compliance risk for your organization.

A brief communication to affected contractors before year-end significantly reduces confusion and documents your organization’s good-faith compliance posture. The communication should:

• State that the federal threshold changed from $600 to $2,000 effective for 2026 payments

• Confirm that no 1099-NEC will be issued for their payments because they fall below the new threshold

• Remind them that all income remains taxable and must be reported on their individual return regardless of whether a form is issued

For contractors in states that have not conformed to the new threshold, note that their state may have separate filing requirements. This is especially relevant for contractors in Wisconsin, Mississippi, and any others that have not implemented the federal adjustment.

How Deel supports 1099-NEC compliance at scale

For organizations managing dozens or hundreds of US contractors, the operational overhead of 1099 forms can add up quickly.

The new 1099-NEC threshold is an opportunity to audit your contractor management infrastructure, not just your filing list. Teams that take the time now to re-segment their roster, update their systems, and communicate proactively to contractors will arrive at January in a significantly stronger compliance position.

Managing a large US contractor roster means navigating a growing patchwork of federal and state requirements. Deel’s Contractor solution brings 1099 generation, misclassification assessment, and contractor payment tracking together in one place, so businesses can manage and pay contractors compliantly at scale.