New IRS FAQs on Overtime Have One Mention of 1099s

The IRS has released more frequently asked questions on the overtime deduction. Most of the new FAQs don’t apply to this audience, but there was one FAQ about 1099s:

Q7. Under what circumstances is qualified overtime compensation reported on Form 1099-MISC or NEC instead of a Form W-2? (added August 6, 2026)

The only circumstance where a payor would report qualified overtime compensation on a Form 1099-MISC or Form 1099-NEC instead of a Form W-2 is when the worker is an employee of the employer for FLSA purposes but treated as an independent contractor for purposes of the Internal Revenue Code.

For information regarding DOL’s analysis for determining whether a worker is an employee or independent contractor for FLSA purposes, see Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) | U.S. Department of Labor. For information regarding IRS’s analysis of worker classification for Internal Revenue Code purposes, see Independent contractor (self-employed) or employee? | Internal Revenue Service.

Circumstances when qualified overtime compensation is properly reported on Form 1099-MISC or NEC are rare. The FAQs below assume Form W-2 reporting to an FLSA overtime-eligible employee, but similar principles in the FAQs below apply to Form 1099 series information reporting to FLSA overtime-eligible individuals.

Contractor vs. Employee, IRS vs. DOL

We have written about this before, but it’s good to revisit this now and then. It would be rare to pay overtime to someone and report it on a 1099 instead of a W-2, but it could happen.

The time when it could happen is if you have a worker classified as an employee under DOL tests and a contractor under IRS tests.

The DOL uses a test called “economic realities,” while the IRS uses a three-factor test that is condensed from what is called the common-law control test.

The vast majority of the time, you’ll reach the same conclusion under both tests. However, there are differences between the tests, and it is possible you could have a worker who is an employee under DOL tests and a contractor under IRS tests.

Another time this could happen — and this would be more common — is if you’ve undergone an IRS worker classification audit and received audit relief called Section 530 relief. This relief allows you to keep treating contractors as contractors for federal tax purposes, even if they are probably employees. This would be a spot where you may well be paying a worker as an employee for most purposes, but they’re a contractor for tax purposes.

Take Action

Review your list of contractors. Think about DOL versus IRS tests for worker classification. Also, review situations where you’ve been audited and received Section 530 relief. Talk to applicable counsel about this issue.