If you work as a freelancer, you report taxes as a business owner. That gives you the benefit of claiming business expenses against your income, but self-employment also creates a lot of reporting requirements that W-2 employees do not have. You need to understand the tax code to ensure you’re compliant and to protect yourself from paying more tax than you should.
Signed into law on July 4, 2025, the One Big Beautiful Bill (OBBB or OB3) created sweeping tax code changes that affect individual taxpayers, investors, and small business owners – but there are also a lot of changes that affect 1099 workers. Keep reading for an overview, or contact us at Wiggam Law today if you’re facing a tax problem.
Key takeaways
- Independent contractors who earn tips can claim a tip deduction but must still report tips as income on their tax returns.
- Freelancers cannot claim the overtime deduction against their freelance income, but may be able to claim the deduction if they or their spouse has overtime pay from a W-2 job.
- As of tax year 2026, the earnings threshold for 1099 income increases to $2000, up from $600.
- Third-party settlement organizations (TPSOs) must issue 1099-Ks if taxpayers receive $20,000 or more and 200 or more transactions.
- The OBBB made the QBI deduction created by the Tax Cuts and Jobs Act permanent.
Self-employed contractors and the OBBB tip deduction
Self-employed people are eligible to claim the OBBB’s tip tax deduction if they receive tips and are in a qualifying industry. The OBBB says that you must be in a profession that traditionally received tips prior to 2025, and to clarify, the Treasury released a long list of tipped professionals, including caterers, bakers, dancers, musicians, digital content creators, house cleaners, electricians, HVAC workers, locksmiths, event planners, photographers, tutors, baby sitters, and tattoo artists.
Unless extended, the tip deduction (commonly referred to as “no tax on tips”) is available from tax years 2025 through 2028. To qualify for the deduction, the tips must be given freely and not required. For example, if you clean homes, you cannot tell your clients to start designating half of their payments as tips, but if they voluntarily add a tip onto your regular rate, that may qualify for the deduction. Note that if you run a specified service business that doesn’t qualify for the QBI deduction (discussed below), you cannot claim this deduction related to tips from that business, either; however, if you have tip income from a W-2 job or another freelance business, you may qualify.
Tracking tip income
So, how do you track tip income so that you can claim the deduction? In some cases, it’s pretty straightforward. Say you drive for a ride-share company and they issue you a 1099-NEC or 1099-K. The form will detail all of your earnings for the year, and then, with most companies, you can generally sign into the app to see which portion of your earnings was tips.
For tax year 2025, Form 1099-NEC does not have a way to distinguish tip income from other payments – that may be updated for tax year 2026 to reflect the changes in the tax code.
But what if your tips aren’t reported like that? What if you receive tips from clients in cash, on Venmo, or even through a check? Then, you’ll need to perform some additional record-keeping. The IRS has stated that tip income must be reported on a W-2, 1099, or another specified statement. To ensure you have records to back up your deduction, consider giving clients a bill with the total for your services and a separate line for the tip. Then, keep that for your records.
In your bookkeeping software, track tip income and regular revenue separately. Most accounting software allows you to track multiple types of income sources, making this relatively straightforward.
Claiming the tip deduction
Traditionally, Schedule C does not provide freelancers with a way to report tip income other than by claiming it as revenue. You’ll need to note all income received as revenue and then claim the tip deduction based on the portion of the revenue that was related to tips. You cannot claim a deduction that exceeds your self-employment income.
What if you are taxed as an S corporation?
If your business is an S-corp, consider reporting tips as part of your employee compensation. That way, the tips will appear on your W-2, and you can claim the deduction based on those payments.
How the OBBB overtime deduction applies to the self-employed
As a 1099 contractor, you cannot receive overtime pay. The money you receive for working is not considered to be wages; it’s considered to be business revenue. By extension, you do not qualify to claim a deduction for overtime pay against your income. Unless extended, this deduction is available for tax years 2025 to 2028.
However, if you earn income from a W-2 position in addition to your freelance work, you can claim the deduction against those earnings. Similarly, if your spouse works a traditional non-exempt job, they can claim the overtime deduction as long as you file jointly – and because you’re filing together, the deduction can be worth up to $25,000, even if your spouse earned all the overtime. The deduction is worth up to $12,500 for individual filers.
The OBBB’s OT tax deduction starts to phase out at $300,000 modified adjusted gross income (MAGI) for a married couple and $150,000 for single filers.
What if I’m an employee/shareholder of an S-Corp?
If you own an S-corp and pay yourself wages, you’re considered to be an exempt employee, meaning that you don’t receive any overtime pay. If you note overtime on a W-2 generated by an S-corp where you’re a shareholder, that may be a red flag, and the IRS may decide to audit your S-corp return and take a look at your compensation.
Updated 1099-NEC and 1099-MISC reporting thresholds
The OBBB increases the reporting threshold for 1099-NEC and 1099-MISC payments to $2000 for tax year 2026 and indexes the threshold to inflation for future years in increments of $100. Prior to the OBBB, the reporting threshold was $600 for decades.
This change has multiple implications for self-employed people, including:
- You may receive fewer 1099-NECs if you do a lot of work for clients who pay you under the threshold.
- You may need to issue fewer 1099-NECs if you pay freelancers to work in your company.
- You must monitor the new levels every year to make sure you’re in compliance.
However, you can avoid 1099-NEC reporting requirements if you pay contractors with a credit or debit card or through a third-party settlement company such as PayPal. Similarly, your clients don’t have to give you a 1099 if you have them pay you through those methods.
1099-K reporting thresholds
The OBBB restored the 1099-K reporting thresholds from the American Rescue Plan Act of 2021 and made the change retroactive to tax year 2022. Third-party settlement organizations (TPSO) such as Venmo or PayPal only have to issue 1099-Ks if you received $20,000 or more and 200 transactions or more.
For instance, if you received $25,000 in a single transaction, the TPSO doesn’t have to issue a 1099-K. Similarly, if you received $19,000 in 250 transactions, the TPSO also doesn’t have a reporting requirement. Your payments must exceed both thresholds.
However, this only applies to TPSOs. If you receive card payments, there’s no minimum reporting threshold – you’ll receive a 1099-K even if you just processed $1 in payments. For example, say that you use Square to process credit card payments, you’ll receive a 1099-K detailing those payments, regardless of the amount or number of transactions.
Note that TPSOs are required to issue 1099-Ks when payments and transactions go over the reporting thresholds, but they are not barred from issuing 1099-Ks on lower amounts of payments.
What if I receive income reported on both a 1099-NEC and a 1099-K?
If the same income is reported on multiple 1099 forms, you should only report the income once on your tax return. For example, this may occur if a client pays you through a TPSO and provides you with a 1099-NEC, while the TPSO also generates a 1099-K for your payments.
Keep detailed records to back up your claims in case of an audit – for example, proof of bank deposits that clearly show the income related to each report.
199A Qualified Business Income (QBI) Deduction.
The OBBB made the QBI deduction permanent. Created by the TCJA, this deduction gives qualifying businesses a deduction worth 20% of their qualified business income. Most of the original terms were preserved, meaning that freelancers will continue to claim this deduction just as they have over the past seven years.
Possible Audit Triggers for 1099 Freelancers
New tax legislation can often lead to confusion, mistakes, and potentially a higher audit risk as the IRS seeks to ensure compliance. Here are some of the potential audit triggers that may come out of the OB3 for 1099 workers:
- Unreported 1099 income – the IRS receives all 1099s issued in your name, and if you don’t report the income, the IRS may flag your return for an audit or adjust the return to show the income.
- Not reporting tip income – no tax on tips doesn’t mean that you don’t have to report the income. You must report the tips, pay self-employment taxes, and then claim a deduction that eliminates your income tax on up to $25,000 in tip income. If the IRS sees that you have tip income on a 1099 but it’s not reported, you may face an audit or adjustment.
- Tip deduction – even if you’re allowed to claim the tip deduction, the IRS may reach out and ask you to substantiate the deduction and your eligibility to claim it.
- Mismatched NAICS numbers – your return may trigger an audit if your NAICS number indicates that you’re not in a profession that normally receives tips, and you claim the tip deduction.
- Overtime deduction claims – freelancers are not subject to overtime rules and thus not eligible for the overtime deduction. Your return will get flagged if you claim this deduction and you don’t have W-2 income on your tax return.
- Mistakes with QBI claims – certain businesses do not qualify to claim the QBI; there are also income caps and other complicated calculations that may come into play. Although this has not changed with the OBBB, you should ensure that you claim this deduction carefully.
Unfortunately, you can never eliminate your audit risk – the IRS can audit any return filed with the agency for up to three years after the filing deadline and even longer in some cases. However, you can make sure you’re ready for an audit by saving records, and you can audit-proof your return by working with an experienced tax professional who understands how to file an accurate return for your industry.
1099 OBBB FAQs
There has been a significant increase in the number of people who work as contractors, whether they fill traditional roles or work in the gig economy. And it can get confusing – especially when the rules change. Take a look at these questions and answers.
Does no tax on tips apply to freelancers?
Yes, freelancers, sole proprietors, and gig economy workers may claim the OBBB’s tip deduction if they have tip income reported on a 1099 or other form, they’re in a profession that customarily receives tips, and they meet other income guidelines or requirements.
Does no tax on overtime apply to 1099 contractors?
No, 1099 contractors are not employees, so they are not subject to the Department of Labor’s overtime rules, and by extension, they do not qualify to claim the OBBB’s overtime deduction. However, if you have overtime reported on a W-2 in addition to your freelance income, you may claim this deduction. Additionally, if you’re married filing jointly, you and your spouse can claim up to a $25,000 deduction against overtime pay, even if just one of you earned the overtime pay.
How should gig workers report tips received through apps or online platforms?
Report all of your income as business revenue, generally on Schedule C of your 1040 income tax return. Then, claim the tip deduction based on how much of your revenue was tips. Do not claim a deduction that exceeds your total self-employment income. Check with an accountant for up-to-date guidance.
What if I didn’t receive a 1099-NEC?
You must report all income, even if it’s not reported to you on a 1099-NEC. Due to the OBBB’s increased reporting thresholds for 10990-NECs, you may receive fewer forms in tax years 2026 and moving forward.
Contact Wiggam Law for Help With Tax Problems Today
If you’re unsure how the OBBB applies to your small business or if you’ve received an IRS notice related to 1099 reporting, contact Wiggam Law for help. Our tax attorneys can review your income sources, ensure compliance, and assist with IRS correspondence or audits tied to misclassified income.
We are very experienced with the full range of tax resolution cases, and we always keep abreast of the newest laws and IRS procedures so that we can provide the best possible representation to our clients. We can also help if you’re worried about the OBBB’s new deduction limits for gamblers, the overtime deduction, or any other provision. We also work with clients who have Qualifying Small Business Stock (QSBS), Opportunity Zone (OZ) investments, and other complex business or investment tax concerns. Don’t wait – reach out today to schedule a consultation.
Sources:
https://www.irs.gov/businesses/understanding-your-form-1099-k
https://www.irs.gov/newsroom/irs-issues-faqs-on-form-1099-k-threshold-under-the-one-big-beautiful-bill-dollar-limit-reverts-to-20000
https://www.irs.gov/businesses/small-businesses-self-employed/reporting-payments-to-independent-contractors
https://taxfoundation.org/blog/199a-deduction-pass-through-business-big-beautiful-bill/