2026 Information Reporting: 5 Payment Types That Deserve a Closer Look Before Filing Season
New thresholds and IRIS are getting the attention. The bigger risk may be payments that were never properly characterized in the first place.
As organizations begin preparing for the 2026 information reporting season, October and November are the right months to review payment data, identify potential reporting issues, and address gaps before year-end.
With significant changes affecting 2026 reporting, including new reporting thresholds and the transition to the IRS's Information Returns Intake System (IRIS), much of the attention has understandably focused on technology, filing requirements, and obtaining accurate taxpayer information.
However, one of the most important aspects of information reporting is often overlooked: determining whether payments have been properly characterized in the first place.
Accounts payable systems typically capture who was paid, how much was paid, and which general ledger account was charged. What they may not capture is the information necessary to determine whether a payment is reportable, which form applies, or whether withholding is required.
While accounts payable may identify payments requiring further review, determining their tax treatment often requires additional information and coordination across the organization. Businesses should establish procedures to ensure that complex payments are reviewed by appropriate personnel before information reporting decisions are finalized.
As organizations review their 2026 payment data, the following five payment categories deserve particular attention.
1. Legal Settlements: Do You Know What You Paid For?
Legal settlements are among the more challenging payments to report because a single settlement can include several components with different tax and reporting requirements.
For example, a settlement may include back wages, compensatory damages, punitive damages, interest, and attorneys' fees.
Depending on the nature of the payment, reporting may be required on Form W-2, Form 1099-MISC, or Form 1099-INT. Certain damages attributable to personal physical injuries or physical sickness may be excluded from income.
In addition, payments made to attorneys can create separate reporting obligations under Section 6045(f), even when the settlement proceeds are ultimately attributable to the claimant.
A recent Tax Court decision, Eiler v. Commissioner, 167 T.C. No. 3 (2026), reinforces an existing principle: settlement proceeds paid to an attorney may still be includible in the claimant's gross income.
Although the decision does not change the information reporting rules, it serves as a timely reminder that the amount ultimately received by the claimant may differ from the amount that must be reported.
What should your organization review?
Confirm that the settlement agreement and payment allocation have been reviewed by appropriate personnel and that the reporting treatment is communicated to those responsible for processing and reporting the payment.
A general ledger entry labeled "Legal Settlement" is not sufficient to determine the reporting treatment.
2. Royalties and Licensing Arrangements: Is It Really a Royalty?
Royalties are another category frequently misclassified by accounts payable departments.
Payments involving software, intellectual property, trademarks, copyrights, equipment, and licensing arrangements may represent royalties, rents, service payments, purchases of property, or a combination of these.
The distinction matters because the reporting requirements can be substantially different.
For example, royalties paid to U.S. persons generally are reportable on Form 1099-MISC, Box 2, when payments total $10 or more. Rents generally are reported on Form 1099-MISC, Box 1, when the applicable reporting threshold is met.
Consider a business that makes payments under a licensing agreement. Depending on the contractual rights and the nature of the transaction, the payments may represent royalties, rents, services, or purchases of property.
The description "License Fee" in an ERP system does not necessarily establish the appropriate tax treatment.
What should your organization review?
Ensure that licensing arrangements have been reviewed by appropriate personnel to determine whether payments represent royalties, rents, services, or purchases of property.
Pay particular attention to arrangements involving intellectual property, content licensing, software, equipment, trademarks, and other property.
3. Commissions and Incentive Payments: Who Earned the Payment?
Commissions are common across many industries, including travel, insurance, retail, technology, and professional services.
However, not every payment described as a commission has the same reporting treatment.
A commission paid to an independent sales representative may constitute nonemployee compensation reportable on Form 1099-NEC.
Other arrangements may involve referral fees, rebates, customer incentives, or payments to intermediaries.
The reporting analysis becomes more complicated when payments are made through third parties or when the individual or entity receiving the payment is not necessarily the party that earned the income.
For example, a travel business may pay commissions to an agency that subsequently distributes amounts to individual travel advisors. Determining the reporting obligations requires understanding the contractual relationships and who is responsible for making the reportable payments.
What should your organization review?
Confirm that the nature of the payment, the recipient's role, and any intermediary arrangements have been reviewed by appropriate personnel before determining the reporting obligations.
Do not assume that every payment labeled a commission automatically belongs on Form 1099-NEC.
4. Prizes and Awards: Not Every Award Is Reported the Same Way
Prizes and awards are frequently overlooked because they may be processed outside traditional vendor payment systems.
Organizations may issue cash prizes, gift cards, merchandise, promotional awards, or other incentives to customers, employees, or third parties.
The reporting treatment depends on the nature of the award and the relationship between the payer and recipient.
For example, prizes and awards paid to nonemployees that are not compensation for services generally are reportable on Form 1099-MISC, Box 3, when the applicable reporting threshold is met.
Awards provided in exchange for services may instead constitute nonemployee compensation, while employee awards may be subject to Form W-2 reporting.
Certain gambling winnings have separate reporting requirements, including Form W-2G.
For 2026, the general Form 1099-MISC reporting threshold for prizes and awards increases to $2,000.
What should your organization review?
Ensure that awards, including those processed outside traditional accounts payable systems, have been identified and reviewed by appropriate personnel to determine the reporting treatment.
Remember that the value of noncash prizes may also need to be considered.
5. Payments to Foreign Persons: Are You Looking Beyond Form 1099?
Payments to foreign persons deserve particular attention because the reporting and withholding requirements can differ significantly from those applicable to U.S. recipients.
A common misconception is that payments to foreign vendors are simply excluded from Form 1099 reporting.
Although payments to properly documented foreign persons generally are not reported on Forms 1099 under the usual Chapter 61 rules, that does not mean the payments are free from U.S. tax reporting or withholding obligations.
Payments of certain U.S.-source income to foreign persons may be subject to withholding under Chapter 3 and reporting on Form 1042-S, even when a tax treaty reduces or eliminates the withholding requirement.
For example, payments for services generally are sourced based on where the services are performed, while royalties generally are sourced based on where the underlying property is used.
Consequently, payments to a foreign consultant performing services entirely outside the United States may have different reporting consequences from payments to a foreign consultant performing services within the United States.
Similarly, royalties paid to a foreign person for the use of intellectual property in the United States may create withholding and Form 1042-S reporting obligations.
What should your organization review?
Confirm that payments to foreign persons have been reviewed by appropriate personnel to evaluate documentation, income sourcing, withholding obligations, and Form 1042-S reporting requirements.
Do not assume that obtaining a Form W-8 automatically eliminates reporting or withholding obligations.
The Common Problem: Does Your Payment Data Tell the Full Story?
Each of these payment categories illustrates a common challenge.
Accounts payable systems are generally designed to process and record payments, not necessarily to determine their tax treatment.
Consider the following descriptions that might appear in an ERP extract:
| Payment description | Information needed for reporting |
|---|---|
| Legal Settlement | What damages were paid? Were attorneys paid? |
| License Fee | Does the payment represent royalties, rents, services, or a purchase of property? |
| Sales Commission | Who earned the commission? Was it compensation for services? |
| Customer Award | Was it a prize, rebate, or payment for services? |
| Foreign Consulting | Where were the services performed? Is the payment U.S.-source income? |
In each example, the payment description alone may be insufficient to determine the appropriate reporting treatment.
The supporting contracts, settlement agreements, payment arrangements, and taxpayer documentation may be necessary to complete the analysis.
This is why reviewing payment data before year-end is so important.
January Should Be for Reporting, Not Investigating Payments
With the significant changes affecting 2026 information reporting, organizations have plenty to address before filing season.
However, new reporting technology and updated filing requirements will not correct payments that have been improperly characterized.
Accurate information reporting begins with understanding what was paid, why it was paid, and to whom the payment should be attributed.
October and November provide an opportunity to identify these issues while there is still time to obtain supporting documentation, resolve questions, and make necessary adjustments.
The goal should be to enter January with payment data that is ready for reporting — not a list of transactions that still need to be investigated.
How InfoReporting Solutions Can Help
InfoReporting Solutions assists organizations with reviewing payment data, identifying reporting obligations, evaluating tax documentation, and preparing Forms 1099 and 1042-S.
Drawing on more than 20 years of Big Four experience in information reporting and withholding, we help tax, finance, and accounts payable teams address complex payment characterization issues and prepare for accurate, timely reporting.
If your organization is preparing its 2026 information reporting data, now is the time to identify and resolve potential reporting issues.
Contact InfoReporting Solutions to discuss how we can assist with your 2026 reporting readiness.
Enter January with payment data that is ready for reporting
We review payment data, identify reporting obligations and evaluate tax documentation, so complex payments are characterized correctly before Forms 1099 and 1042-S are prepared.