This blog was last updated on July 7, 2025
In the whirlwind of tax policy changes sweeping through Congress, one provision of the recently passed “One Big Beautiful Bill” (OBBB) has quietly slipped through with minimal public scrutiny, despite its potentially massive fiscal impact. The bill increases the reporting threshold for Forms 1099-NEC and 1099-MISC from $600 to $2,000 for payments made after December 31, 2025, with future adjustments tied to inflation. While positioned as regulatory relief for small businesses, this change could cost the federal government billions in revenue annually impacting revenue that is already legally owed under current tax law.
The Numbers Tell the Story
The Internal Revenue Service’s comprehensive Tax Gap reports provide compelling evidence of what happens when income isn’t subject to third-party information reporting. According to the IRS’s Tax Year 2022 estimates:
- Income subject to substantial information reporting and withholding: Only 2% is underreported
- Income subject to substantial information reporting (but not withholding): 6% is underreported
- Income subject to some information reporting: 19% is underreported
- Income subject to little or no information reporting: 47% is underreported
These figures represent three decades of consistent findings across multiple IRS studies. The relationship is clear and stark: when taxpayers don’t receive information returns like Forms 1099, they dramatically underreport their income.
The Math Behind the Revenue Loss
To understand the potential fiscal impact, consider that the current $600 threshold captures millions of transactions that would escape reporting under the new $2,000 threshold. Based on IRS data:
- The individual income tax underreporting gap was $381 billion annually for Tax Year 2022
- Business income (primarily from activities that generate 1099s) accounted for 47% of this gap
- Nonfarm proprietor income, much of which is reported via 1099s, had a 31% net misreporting rate
When we extrapolate the 55% underreporting rate for income with little to no information reporting, even a conservative estimate suggests that raising the threshold from $600 to $2,000 could result in billions of dollars in lost tax revenue annually.
The Real-World Impact
The consequences extend beyond abstract fiscal projections. Consider these scenarios:
Scenario 1: The Freelance Consultant A marketing consultant performs $1,800 worth of work for a client. Under current law, no 1099 is required. Under the previous $600 threshold (if it had been implemented), this income would have been reported to the IRS. Statistical evidence suggests there’s a 55% chance this income won’t be properly reported on the consultant’s tax return.
Scenario 2: The Small Business A small business pays various contractors between $600-$1,999 throughout the year. Under the OBBB, these payments escape information reporting entirely, significantly increasing the likelihood of underreporting across multiple income streams.
Why Information Reporting Matters
The effectiveness of information reporting isn’t theoretical—it’s one of the most successful compliance tools in the modern tax system. The IRS has documented that:
- Wage and salary income (subject to both withholding and information reporting) has a 99% voluntary compliance rate
- Investment income (subject to information reporting only) has a 94% voluntary compliance rate
- Business income with little reporting has roughly a 45% voluntary compliance rate
This dramatic difference occurs because information reporting creates a “matching” system where the IRS can automatically detect discrepancies between what’s reported to them and what appears on individual tax returns.
The Inflation Indexing Problem
The OBBB compounds the potential revenue loss by indexing the $2,000 threshold to inflation. This means that over time, an increasing share of business payments will fall below the reporting threshold. Given that inflation averages 2-3% annually, the $2,000 threshold could exceed $2,700 within a decade, further eroding the information reporting system’s effectiveness.
A Balanced Perspective
It’s important to acknowledge the legitimate concerns driving this change. Small businesses do face administrative burdens from issuing numerous 1099 forms, and there are real compliance costs associated with the current system. However, these costs must be weighed against the substantial revenue loss and the erosion of tax system integrity.
The question isn’t whether businesses should receive regulatory relief—it’s whether the chosen approach optimizes the balance between compliance burden and revenue protection. Alternative approaches might include:
- Simplified electronic filing for 1099s to reduce administrative burden
- Safe harbors for businesses with minimal 1099 activity
- Graduated thresholds based on business size
- Enhanced penalties for non-compliance to maintain deterrent effect
The Bottom Line
The One Big Beautiful Bill’s changes to tax reporting thresholds represent a significant policy shift likely to reduce federal tax revenue by billions of dollars annually. This isn’t new revenue or higher taxes; it’s revenue that is already legally owed under current tax law. With the federal government facing ongoing fiscal challenges and the national debt exceeding $33 trillion, policies that make it easier to avoid paying legally owed taxes deserve careful scrutiny. The IRS Tax Gap, the difference between taxes owed and taxes collected, currently stands at approximately $700 billion annually.
The data from thirty years of IRS compliance studies provides a clear warning: reducing information reporting requirements will likely result in significantly higher levels of tax underreporting. Policymakers should carefully consider whether the administrative relief provided to businesses justifies the substantial cost to federal revenues. The choice is clear; we can maintain robust information reporting requirements and collect the revenue legally owed, or we can provide regulatory relief while accepting billions in lost revenue.