2026 Tax Updates to Overtime & 1099 Reporting

With the passing of the most recent tax legislation in July 2025, there are key provisions that could affect your work. This post breaks down what’s new, what’s changing, and key actions your org should take to stay compliant and reduce risk. The information below is meant to be a primer – be sure to check in with your finance & tax folks to ensure you’re compliant in your specific situation.

No Tax on Overtime

• Employers must report qualified overtime separately on employees’ W-2 forms (or other required statements)
• Payroll systems may need updating to capture and seperate “qualified overtime” amounts.
• Be careful in classifying which overtime pay qualifies: only FLSA-required overtime (for non-exempt employees) counts. Voluntary bonuses or state/local-only overtime mandates may not qualify.
• The deduction relates only to federal income taxes; payroll taxes (Social Security, Medicare) and state/local income taxes are unaffected.

Increased 1099-NEC Reporting Thresholds

Another major shift involves the thresholds at which payors must file 1099 forms for payments to contractors or vendors.

What’s Changing

• For 1099-NEC (non-employee compensation) and many 1099-MISC payments, the threshold increases from $600 to $2,000, beginning with payments made after December 31, 2025 (i.e., the 2026 tax year)
• Starting in 2027, the $2,000 threshold is indexed for inflation, meaning it may gradually rise in future years.

Preparing For These Changes

Review your contractor/vendor payments workflow

• Update your 1099 policies and internal procedures so that, starting in 2026, you won’t issue 1099s for amounts under $2,000
• Train your finance team and review your accounting software to ensure the new regulations are being followed

Audit your employee overtime practices

• Ensure proper classification of employees (especially non-exempt vs exempt under FLSA). Only non-exempt employees are eligible for overtime and this updated reporting
• Make sure you have an understanding of what payments of overtime qualify
• Collaborate with your payroll provider to make sure you understand where to record qualified overtime payments so it’s properly recorded on the W-2

Educate your team

• Folks at your org should understand the changes so that fundraising, budgeting, and program strategy incorporates the new tax guidance