The Senate's amendment sets aside $44 billion in unused, previously appropriated funds to cover the repeal's cost.
President Obama's fiscal year 2012 budget still contains a portion of the 1099 provision while eliminating the requirement for goods but retaining it for services.
The proposal is expected to raise about $10 billion over 10 years.
The National Federation of Independent Business blasted the new 1099 proposal as a "bait and switch."
"We are disappointed that the president has not clearly heard what small businesses are saying," NFIB senior vice president of Federal Public Policy Susan Eckerly said in a statement. "We at NFIB remain committed to helping the president and Congress understand the needs of small business as the budget process moves forward."
An administration official said the scaled-down proposal isn't as controversial as the healthcare reform law provision and has been proposed in the past.
Still, the administration's budget proposal has tax attorneys scratching their heads; the president himself criticized the healthcare law's reporting requirement in his State of the Union address and the Senate has already voted to repeal it. The Ways and Means Committee is due to mark up the House version of repeal legislation on Thursday.
The White House's Office of Management and Budget explained the rationale in its Analytical Perspectives.
"The administration recognizes the burden that this expanded information reporting provision will put on small businesses and proposes to repeal the provision," the document says. "Instead, the administration proposes that a business be required to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation); information returns would not be required for payments for property."
Julian Pecquet contributed to this story.