Several payroll and tax reporting rules change for 2026. Most of them are good news for small businesses, but a couple can trip you up if your payroll setup doesn’t keep up. Here are the five I’m walking my clients through this year, and what each one means for you.
1. The 1099 threshold goes from $600 to $2,000
Starting January 1, 2026, you only have to file a 1099-NEC (for contractors) or a 1099-MISC (for things like rent) when you pay one person or business $2,000 or more in a year. For years, that number was $600. Starting in 2027, the $2,000 will be adjusted for inflation.
- The W-2 threshold moves to $2,000 too, but only for wages where no federal income, Social Security or Medicare tax was withheld. Normal paychecks with withholding still always get a W-2.
- The new limit applies to payments made during 2026.
- The 1099s you file in early 2026 cover 2025, so those still use the old $600 limit.
- If you use the new limit on your 2025 forms by mistake, you could miss forms you were required to file, and that can mean penalties.
So for the filing season right in front of you, nothing changes. The relief shows up when you file for 2026, in early 2027.
2. Ten or more forms means you must e-file
If you file 10 or more information returns in total, the IRS requires you to file them electronically. That count adds up all of your forms together, not each type on its own.
- W-2s, 1099-NECs, 1099-MISCs, 1099-INTs and 1099-DIVs all count toward the 10.
- Once you hit 10, you file through the IRS FIRE or IRIS systems.
- Mailing paper forms at that point doesn’t meet the rule.
- If e-filing is a real hardship, you can ask for a waiver on Form 8508, but approval isn’t guaranteed.
A business with six employees and four contractors is already there.
3. Tips and overtime now need their own line
The new tax law (P.L. 119-21) lets employees deduct certain tips and overtime pay. To claim those deductions, they need their employer to report those amounts separately.
- Tips: Employees in jobs that customarily got tips can deduct up to $25,000 of qualified tips. Mandatory service charges don’t count.
- Overtime: Employees can deduct the “half” part of time-and-a-half that federal overtime law requires, up to $12,500 ($25,000 for married couples filing jointly). Your payroll system has to track that extra half separately from regular hourly pay.
- Starting with 2026 W-2s, you report these in box 12: code TP for the total cash tips employees reported to you, and code TT for the total qualified overtime pay (the whole amount, even if it’s more than the employee can deduct). Box 14b gets the employee’s Treasury tipped occupation code.
- Tips and overtime are still subject to Social Security and Medicare tax. The deduction only affects federal income tax.
Your employees use these numbers to claim the deduction, and the IRS can penalize a wrong W-2, which then has to be fixed on a W-2c. That’s the kind of thing they’ll come asking you about at tax time, so it’s worth getting right now.
4. 1099-K goes back to $20,000 and 200 transactions
For several years there was talk of a $600 reporting threshold for payment apps like PayPal and Venmo, but it kept getting put off. The new tax law cancelled it and went back to the original rule.
- A payment app only has to send you a 1099-K if you receive more than $20,000 in payments and have more than 200 transactions.
- Card processors can still send a 1099-K for smaller amounts, and some states have their own lower limits.
Whether you get a 1099-K or not, the income still counts. I always match 1099-K amounts against the books, because a mismatch is one of the easy ways to draw IRS attention. I cover more of those in 7 Bookkeeping Mistakes That Trigger IRS Audits.
5. The 2026 wage limits
Here are the numbers your payroll needs to use this year:
- Social Security: 6.2% from the employer and 6.2% from the employee, on wages up to $184,500. That’s a maximum of $11,439 per side.
- Medicare: 1.45% each, with no wage limit.
- Additional Medicare: you must withhold another 0.9% from an employee’s wages over $200,000 in the year.
- Household employees: Social Security and Medicare apply once you pay one $3,000 or more in cash wages in 2026.
- FUTA (federal unemployment): 6.0% on the first $7,000 paid to each employee, before the state credit most employers get.
How I help clients stay on top of this
I’m Miles, a certified QuickBooks ProAdvisor at MilesP Bookkeeping, LLC. I work with small businesses in Columbia, Waterloo and Belleville, IL and across St. Louis, MO. For payroll, here’s what that looks like:
- Tracking contractor payments so we know who crosses the new $2,000 line.
- Setting up payroll to report tips and overtime separately for the W-2.
- Reconciling your bank accounts every month so 1099-K amounts match your income.
- E-filing your forms when you have 10 or more.
- Preparing financial statements that back up your payroll tax numbers.
Next step
Take a look at what your current payroll provider can do. If it can’t handle the new tip and overtime reporting (codes TP and TT) for 2026, it may be time to hand payroll off. If you’d like a second set of eyes, get in touch or call (800) 926-7710.