Do You Pay Taxes on Contractor Referral Fees?

Yes, contractor referral fees are taxable income from the first dollar, whether or not anyone ever sends you a form. What changed for 2026 is the paperwork. For payments made after December 31, 2025, the threshold that forces a business to file a Form 1099-NEC rose from $600 to $2,000, under Section 70433 of Public Law 119-21 , the One Big Beautiful Bill Act, signed July 4, 2025. Most tax pages on the internet still quote the old $600 number. They are describing the old rule.

Keep the two ideas separate, because mixing them up is how referrers get into trouble. The $2,000 threshold decides when the payer must report. It never decides whether you owe tax. You owe income tax on referral fee number one, and once your net self-employment earnings hit $400 in a year, the IRS says you must file a return and pay self-employment tax on top. A missing 1099 does not make income invisible.

What is the 1099 reporting threshold for referral fees in 2026?

Short answer: $2,000 per payer, per year, for payments made in calendar 2026. That is the new federal threshold at which a business must file a Form 1099-NEC (or 1099-MISC) for money it paid you, up from the $600 figure that had stood for decades.

The change is statutory, not an IRS policy tweak. Section 70433 of Public Law 119-21 amends the Internal Revenue Code directly, and the operative language is one line:

“(a) In General., Section 6041(a) is amended by striking “$600” and inserting “$2,000”.” … “(f) Effective Date., The amendments made by this section shall apply with respect to payments made after December 31, 2025.”

— P.L. 119-21, § 70433(a), (f), 139 Stat. 243–244

The same section ties the 1099-NEC statute (IRC § 6041A, remuneration for services) and the backup-withholding trigger (IRC § 3406) to that same dollar amount, so the whole reporting stack moves together. The IRS confirmed the mechanics in Notice 2025-62: “Section 70433(a) of the OBBBA increased the reporting threshold under section 6041(a) from $600 to $2,000 with respect to payments made after December 31, 2025, and before January 1, 2027.” And the current Instructions for Forms 1099-MISC and 1099-NEC now read simply: “Enter nonemployee compensation (NEC) of $2,000 or more.”

Three timing details matter, and stale web pages botch all three:

• The threshold follows the payment year, not the filing year. Forms covering 2025 payments, the ones that went out in January 2026, still used $600. The $2,000 test applies to money paid during 2026, reported on forms filed in early 2027.
• It is exactly $2,000 for all of 2026. Inflation indexing starts with payments made in calendar 2027, using a 2025 cost-of-living base, with increases rounded to the nearest $100 (new IRC § 6041(h), added by § 70433(b)).
• Most pages still say $600. As of late August 2026, a large share of W-9 explainers, payer help centers, and tax blogs still cite the old figure. They are out of date, not a conflicting authority.

Which 1099 thresholds changed for 2026, and which didn’t?

Not everything moved to $2,000, and a blanket “all 1099s now use $2,000” claim is wrong. Here is the box-by-box picture, per the current IRS instructions and the IRS’s 1099-K FAQ:

The 1099-K row deserves its own warning, because half the confusion online comes from mashing the two rules together. A separate provision of the same law reverted the 1099-K threshold for payment apps and online marketplaces back to $20,000 and more than 200 transactions. Different form, different rule, different dollar amount. A referral fee paid to you directly by a contractor or a platform is 1099-NEC territory, and $2,000 is your number.

Are referral fees taxable income even without a 1099?

Yes. All of it, from dollar one. The reporting threshold is about the payer’s paperwork, not your taxability. This is the single most important sentence in this article.

Congress raised the reporting threshold; it did not create a $2,000 tax-free allowance. Nothing in Section 70433 touches the payee’s side of the ledger. Referral income is ordinary income the moment it is paid, exactly as it was under the $600 rule, exactly as it would be with no rule at all. And the trigger that matters for you sits far below $2,000: per the IRS Self-Employed Individuals Tax Center, “You have to file an income tax return if your net earnings from self-employment were $400 or more.” So a referrer who cleared $1,200 in fees during 2026 will likely receive no 1099 at all, and still owes income tax on the full $1,200, plus self-employment tax if the activity is a business. The form is a carbon copy for the IRS, not a permission slip for you.

What gets reported and what do you owe? Five referral scenarios

Here is how the pieces fit together for a Phoenix referrer, a realtor, a property manager, or the neighbor everyone texts for a contractor name. Assume the payer is a business and the fees are your only self-employment income:

Federal rules from P.L. 119-21 § 70433 and IRS guidance linked throughout this article. Arizona adds its flat 2.5% income tax on top in every taxable row, see below. Whether a scenario is a “hobby” or a “business” is a facts test, covered next.

Is your referral income a hobby or a business?

Short answer: occasional, no-profit-motive referrals are hobby income, reported, but with no deductions and no self-employment tax. Regular, profit-seeking referral activity is a business, Schedule C, deductions allowed, self-employment tax owed.

The IRS does not let you pick whichever label is cheaper. It weighs a list of factors , eleven questions on its current guidance page, none decisive on its own: whether you operate in a businesslike manner and keep records, whether your time and effort show profit intent, whether you depend on the income, whether you adjust how you operate to improve results, and whether the activity actually turns a profit over the years. A property manager routing maintenance jobs to contractors every month and collecting fees is running a business under almost any reading of that list. A homeowner who recommended their roofer once and got a thank-you payment probably is not.

The label changes three real outcomes:

• Where the income goes. Hobby income is reported as additional income on Schedule 1 of Form 1040. Business income goes on Schedule C. Either way, per the IRS, “Taxpayers who make money from a hobby must report that income on their tax return.”
• Whether expenses count. For hobbies, the IRS is blunt: “[T]he expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted.” A business deducts ordinary and necessary expenses on Schedule C before tax is figured.
• Whether self-employment tax applies. Self-employment tax attaches to net earnings from a trade or business. Hobby income sits outside it, which sounds like a win until you notice you also gave up every deduction.

For most readers of this site the question answers itself. If you are referring jobs on purpose, repeatedly, for money, the exact activity our guide to whether contractor referral fees are legal walks through. You are describing a business, and Schedule C treatment is the honest default.

How do you report referral income on Schedule C?

Short answer: referral fees go on Schedule C as gross receipts, expenses come off, and the net profit flows to your Form 1040 and to Schedule SE, where self-employment tax is figured at 15.3%.

Schedule C is the sole-proprietor form, no LLC or EIN required to use it. You list what the referral activity brought in, subtract what it cost you, and the net profit is what gets taxed. Two taxes then apply at the federal level:

• Ordinary income tax at your regular bracket, on net profit along with the rest of your income.
• Self-employment tax once net earnings reach $400. Per the IRS: “The self-employment tax rate is 15.3%,” made up of 12.4% for Social Security and 2.9% for Medicare. This is the piece W-2 earners never see, because an employer quietly pays half of it. Self-employed, you pay both halves, and then, per the same IRS page, “you can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income.”

Two more Schedule C mechanics are worth knowing. First, the qualified business income deduction lets eligible sole proprietors deduct up to 20 percent of qualified business income, whether or not they itemize, and the same 2025 law that raised the 1099 threshold extended and enhanced that deduction (P.L. 119-21, § 70105). Second, taxes on referral income are pay-as-you-go: the IRS says individuals “generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed” (IRS, Estimated Taxes), using quarterly Form 1040-ES vouchers. Cross that line without paying in and you can owe an underpayment penalty on top of the tax.

What deductions can a referrer take?

If your referral activity is a business, the ordinary-and-necessary expenses of running it come off the top before any tax is figured. For a typical Phoenix referrer that list is short but real:

• Phone and internet, the business-use percentage of the plan you use to field “who should I call?” texts and coordinate introductions.
• Mileage, driving to meet a contractor or walk a property for a referral, at the IRS standard mileage rate published for the year (track the trips; the log is the deduction).
• Software and subscriptions, a CRM, a scheduling tool, anything you use to track referrals and payouts.
• Marketing, business cards, a simple website, the coffee meeting where you set up a referral relationship (meals are generally only partially deductible; ask your CPA).
• Professional fees, the CPA who prepares the Schedule C, or the attorney who reviewed your disclosure template.
• Home office, if a space is used regularly and exclusively for the activity; the simplified method keeps the math painless.

The half-of-self-employment-tax deduction rides separately, as an adjustment to income rather than a Schedule C expense. And remember what hobby treatment costs: report the income, deduct nothing. Records are what make business treatment stick, a simple ledger of each referral, the payer, the date, and the fee is the cheapest audit insurance there is.

What does the payer file, FindAZPros, a contractor, or a platform?

Short answer: the business paying you collects a Form W-9, and if it pays you $2,000 or more during 2026, it files a 1099-NEC with the IRS and sends you a copy by the January 31 deadline, which lands on Monday, February 1, 2027, since January 31 falls on a Sunday.

From the payer’s side, the sequence is standard. Before paying, they ask you for a W-9, your name, address, and taxpayer identification number. That form is not a tax charge; it exists so any required 1099 is accurate. Refuse to provide a correct TIN and the payer can be required to withhold at “the current rate of 24 percent” as backup withholding, and Section 70433 tied that trigger to the same $2,000 amount. Then, per the form instructions, payers of $2,000 or more in nonemployee compensation furnish the payee statement and file with the IRS by January 31.

In the FindAZPros model this bookkeeping is unusually simple, because the money moves in one clean shape: a Pro owes a success fee only when a referred job completes, and the referral partner earns half of that fee. There is no per-lead billing to reconcile and no pile of micro-payments. On the representative example used across this site, a $10,000 job at an illustrative 10% success fee, the referrer’s share is roughly $500 per completed job, so a handful of completed referrals from one payer is what carries you past the $2,000 reporting line. How big real-world fees run, and what is typical in the Valley, is its own topic, we break it down in our Phoenix referral-fee benchmarks guide. Either way, your duty is the same: track every fee yourself and report the total, because the total is taxable whether it arrives with a form or not.

Does Arizona tax contractor referral fees?

Short answer: yes, at a flat 2.5%. Arizona’s income tax starts from your federal adjusted gross income, so referral income on your federal return flows straight into your Arizona return.

Arizona keeps this part mercifully simple. The state’s individual income tax statute, A.R.S. § 43-1011, sets the operative rate in one clause: “the tax is 2.5% of taxable income”, a single flat rate. The Arizona Department of Revenue confirms it applies for tax year 2023 and beyond. The agency stopped posting optional tax tables entirely “due to Arizona’s flat tax rate of 2.5%”, and its January 2024 individual income update spells out that the 2.5% rate covers all income levels and filing statuses. And the on-ramp is automatic: A.R.S. § 43-1001(2) provides that “‘Arizona gross income’ of a resident individual means the individual’s federal adjusted gross income for the taxable year, computed pursuant to the internal revenue code.” There is no separate Arizona referral-fee exemption and no separate Arizona self-employment tax. Practically: whatever net referral profit lands in your federal AGI gets Arizona’s 2.5% on top of your federal bill.

One Arizona-specific note for the biggest referrer profile: property managers here are almost always real-estate licensees, which layers disclosure and commissioner’s rules on top of the tax questions in this article. That side of it, what ADRE expects, and how to structure the income cleanly, is covered in the Arizona property manager’s guide to contractor referral income.

The bottom line

Do you pay taxes on contractor referral fees? Yes, every dollar, every year, form or no form. The 2026 change is narrower than the headlines suggest: Section 70433 of Public Law 119-21 raised the payer’s 1099-NEC reporting threshold from $600 to $2,000 for payments made after December 31, 2025, and stale pages citing $600 are describing the old rule. Your own obligations never moved. Income tax applies from dollar one, self-employment tax arrives at $400 of net earnings, Arizona takes a flat 2.5%, and quarterly estimates are expected once you will owe $1,000 or more. Treat the activity like the business it is, keep a ledger, save for the tax, take the deductions you have earned, and referral income is some of the cleanest side income there is.

If you want the income without the paperwork chaos, structure helps. FindAZPros pays referral partners half the success fee after each referred Phoenix job completes, one payer, one payment per completed job, and records that make January easy. Become a referral partner and put the jobs you already hear about to work.

Sources

• Public Law 119-21 (One Big Beautiful Bill Act, July 4, 2025), § 70433, $600 to $2,000 threshold, effective date, inflation indexing; § 70105, qualified business income deduction (govinfo.gov)
• IRS Notice 2025-62, 2025 penalty relief for tips/overtime information reporting; its Background (§2.02) confirms the §70433 threshold increase from $600 to $2,000 for payments after December 31, 2025
• IRS Instructions for Forms 1099-MISC and 1099-NEC (Rev. 12/2026), $2,000 threshold, unchanged carve-outs, January 31 deadline
• IRS Self-Employed Individuals Tax Center, $400 net self-employment filing threshold
• IRS, Self-employment tax: 15.3% rate (12.4% Social Security + 2.9% Medicare) and the employer-equivalent deduction
• IRS, Estimated taxes: the $1,000 expected-tax trigger and Form 1040-ES
• IRS, Backup withholding at the current rate of 24 percent
• IRS, Hobby vs. business: the eleven-question factors test
• IRS, Hobby income must be reported; hobby expenses can no longer be deducted
• IRS, 1099-K threshold reverts to $20,000 and 200+ transactions under the OBBBA
• IRS, Qualified business income deduction of up to 20 percent
• A.R.S. § 43-1011, Arizona individual income tax: “the tax is 2.5% of taxable income”
• A.R.S. § 43-1001. Arizona gross income defined as federal adjusted gross income
• Arizona Department of Revenue, Form 140 Optional Tax Tables: no tables to post for tax year 2023 and beyond “due to Arizona’s flat tax rate of 2.5%”
• Arizona Department of Revenue, January 2024 individual income update: the 2.5% rate applies for all income levels and filing status

This article is general information about federal and Arizona tax rules, not tax or legal advice. Thresholds and rates cited are current as of August 2026 and can change. For your specific situation, consult a CPA, enrolled agent, or tax attorney.