Recent Changes in Tax Reporting Regulations

“Don’t worry, just act like nothing happened.”

This could serve as a provisional directive within President Donald Trump’s extensive tax and spending cut proposal.

The package introduces new measures for businesses submitting 1099-NEC and 1099-MISC forms to the IRS, detailing how much non-employee compensation they plan to pay vendors and contractors. This marks a departure from longstanding procedures, but we’ll delve into the details shortly.

The outcomes of these changes suggest that the IRS will have significantly fewer third-party reports to sift through, leading to less visibility into the income that small businesses and independent contractors are set to earn.

It’s crucial to point out that despite these adjustments, small businesses, freelancers, and contractors are still obligated to accurately report all their income on their own tax returns.

First, let’s consider the implications for “third-party settlement organizations,” which includes payment apps like Venmo.

In the past, these platforms were required to file a 1099-K form with the IRS for any individual whose combined transactions exceeded $20,000.

However, under the US Rescue Plan Act, that threshold has been dropped to just $600, essentially scrapping the revisions that were intended to roll out in 2021. These new rules had been delayed for several years, and any requirements for reporting taxes under those revisions were pushed to 2025, with a $2,500 threshold for the current year.

But, let’s not worry about that anymore. The updated tax law will reinstate the old 200 transactions/$20,000 threshold.

The second change reinforces decades-old practices, affecting various businesses, as explained by Wendy Walker, vice president of regulatory affairs at Sovos, a compliance software company.

Previously, businesses had to issue 1099-NEC or 1099-MISC forms to report one-time non-employee compensation to independent contractors and vendors throughout the year. This includes everyone from landscapers to legal and accounting service providers.

The revised law will now elevate the required reporting threshold from $600 to $2,000, starting December 31, 2025, and that amount will be adjusted for inflation annually.

“This is a significant revision,” Walker noted, adding, “nearly every business in the U.S. will feel the impact.”

With these two changes, businesses will have to deal with much less paperwork. This also lowers the likelihood of facing IRS penalties for late or incorrect submissions, which is definitely a relief.

In particular, the changes to the 1099-NEC rules could provide more stability for small to medium-sized businesses. Walker mentioned that many of her small business clients have vendors under the $2,000 threshold each year, which could lead to a reduction of up to 30% in the 1099s they need to issue.

Furthermore, both rule changes imply that freelancers, contractors, and vendors will have reduced recordkeeping duties when it comes to third-party reports for tax purposes.

However, this lack of dependable third-party records might result in the IRS collecting less revenue overall. The Tax Commission estimates that these two provisions could lead to a combined reduction in federal revenue by roughly $13 billion over the next decade.

This drop might stem from underreported income, which has significantly fueled the nation’s estimated tax gap—the amount that is owed but not voluntarily paid on time.

According to the IRS, underreporting accounted for $53.9 billion, contributing to an annual tax gap estimated at $69.6 billion.

Interestingly, the same report highlighted that the share of total tax discrepancies tied to underreporting is lowest among those whose income is subject to extensive third-party reporting and withholding. For instance, basic W-2 employees typically have very stable salaries.

Conversely, underreporting accounts for a staggering 26% (or $179 billion) of tax discrepancies among those who are least likely to have their income reported through third-party means, like freelancers and sole proprietors.