New December 2026 final Forms 1099-NEC and 1099-MISC were recently published. Significant changes were made to each form due to last summer's big tax bill. To that end, an initial draft of changes to these forms was released last fall. In April of this year new drafts of the 1099-NEC and 1099-MISC were released that superseded those earlier versions. Finally, late this spring those second drafts were finalized and dated to December 2026. As of right now, these are the Forms 1099-NEC and 1099-MISC you will use to file with early in 2027 for most payments made to contractors in the ordinary course of your business during 2026. 

As part of last summer's tax bill, provisions were included that, for 2025 through 2028, created new deductions for employees who receive qualified tips income or qualified overtime income. This has ramifications for not only federal enforcement (which we believe will be higher in regards to the new boxes on the Forms 1099-NEC and 1099-MISC because of the propensity for fraud they have created), but state as well. Remember, qualified tips and qualified overtime for federal purposes may still be fully taxable for state and local income tax purposes (where applicable). Consequently, state level enforcement is also likely to rise. This increase in enforcement will have knock on effects that, as we have been discussing for months now, will dramatically increase the likelihood of audit and expensive fines. 

Today, we are seeing early evidence of increased auditor attention to such matters. As reported by the Detroit Free Press yesterday, the U.S. Department of Labor announced that four Leo's Coney Island franchises in Metro Detroit will have to pay more than $500,000 to 100 workers who were not paid overtime wages. The defendants also must pay $73,784 in penalties and $10,000 in attorney fees.  Officials at the Department of Labor’s Wage and Hour Division said the ownership group paid workers straight-time rates for all hours worked over 40 when they were legally obligated to pay them time-and-a-half their regular rate under the Fair Labor Standards Act (FLSA). 

The FLSA is an important law. It applies for a variety of reasons - not least of which if a worker is misclassified as a contractor but is actually an employee based on an "economic realities" test, which assesses if they are economically dependent on the employer. The kinds of issues facing the franchise owners of these restaurants are exactly the kind of follow-up effects that can arise if the U.S. Treasury Department or Department of Labor (or a state level regulator) take an interest in other labor violations such as those tied into the big new changes rolled out in recent months to what are arguably the three most important information returns (the W-2, 1099-NEC, and 1099-MISC). 

Even if you believe you don't have workers to whom you would be reporting overtime and tipping as per the new law, it behooves you as a third party payor and employer to take the time to document in writing that your contractors could not, in fact, be considered employees under the FLSA. Such documentation goes toward boosting your arguments for waiver of proposed penalty against what a regulator might claim to the otherwise. Again, these are audit situations that are more likely than in years past. That is specifically because of the July 2025 tax law and the new changes in response to the major information returns you file. As such, it is particularly important to be vigilant this year and as you enter your Fall 1099 Year-End prep.