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1099 Forms: Stop the Paperwork Avalanche

[Update: Please note that the materials I read from business advocacy groups pushing for the repeal of the 1099 regulations failed to mention a major loophole in the rules: that paying by credit card avoids having to report a transaction by 1099.]

I was reminded reading this week’s issue of CLNOnline of a serious issue that is facing all businesses in this country that I think too few small business owners are aware of…the coming change in IRS reporting regulations that will have all of us at all levels of our industry creating and sending loads of 1099 forms like the one pictured below.

A tiny provision that was inserted into this year’s massive healthcare reform legislation will alter the rules starting with transactions on January 1st, 2012 (meaning the 2012 tax year) for what has to be reported to the IRS via 1099 forms.

Currently, businesses that purchase more than $600 in services from individuals in a year have to file a 1099 form covering their payments to that person, and send copies to the individual, the IRS and possibly the state as well. Mostly the recipients of 1099′s for these sorts of payments under the current system are freelance workers.

Under the new law, businesses will have to file 1099 forms for any vendor that they buy more than $600 in services OR goods from during the tax year [unless they pay with a credit card].

Yes, you read that correctly….I said services OR goods. And from any vendor, not just individuals. The paperwork implications are staggering [if you use payment methods other than credit cards].

So, retailers, you’d have have to send 1099 forms to every supplier that you buy more than $600 in inventory from. Everyone the IRS considers a business (probably including people who file Schedule C’s on their personal returns for their business operations, depending on the implementation rules that the IRS writes) will have to send a 1099 form to anyone they make a large purchase from. Buy a new computer? If it costs more than $600 you’ll have to send the retailer a 1099. Travel to CHA or another event? If you spend more than $600 with the same airline or hotel in the same tax year…there’s another 1099 form you have to send. Are you a designer that writes off your supply purchases? If you buy more than $600 during the year from a single store, better pay with a credit card or you’ll have to send them (and the IRS) a 1099.

Besides creating and issuing all that paperwork, there is another step involved. Before you can create the 1099, you have to collect the TIN (Taxpayer Identification Number) from the entity that you have to issue the 1099 to. This is usually done via w4 W9 form. Current IRS rules require that payment to an entity be withheld until a TIN is provided for filing a 1099…Picture checking into a hotel and having to tell the clerk that they can’t have your credit card until the company provides you a W4 form because you know the bill will be over $600. That conversation would go well, I’m sure. [edited because it appears credit card transactions are exempt]

The practical implications are ridiculous for companies both large and small. Large companies (airlines, office supply stores, and numerous others) will have to implement systems to provide W4 information at pre-purchase to tens of thousands of their customers. This will require huge amounts of staff and other resources or expensive website redesign or both. Small companies will have a huge paperwork burden placed on them to create and send 1099 forms for even basic expenses of running a small business.

The National Association of the Self-Employed did a survey of its members, asking them to review their records from the most recent tax year. Under the current system, NASE members responding to the survey had filed an average of 2.31 form 1099′s. However, reviewing their records showed that under the new system, the NASE members would have had to file an average of 26.71 form 1099′s – a tenfold increase in their paperwork burden.

That burden has united companies both large and small in fighting this new requirement. Many business groups (in fact, practically every major business group in the country) have joined the fight against the new 1099 requirements, including:

  • U.S. Chamber of Commerce
  • National Association of the Self-Employed
  • American Institute of Certified Public Accountants
  • National Federation of Independent Business

The National Taxpayer Advocate has also come out against the 1099 reporting reform.

Both Democrats and Republicans have pledged to repeal the new reporting rules but are divided on how to do it. Legislation has been introduced in both the House (H.R. 5141, The Small Business Paperwork Mandate Elimination Act) and Senate (S.3578 – Small Business Paperwork Mandate Elimination Act) to repeal the 1099 reporting expansion. However, several attempts to repeal the 1099 rules through amendments to other legislation have already been defeated and action is not guaranteed to be successful.

So, business owners, now is the time to tell your Senator and Congressman that you support repealing the expansion of 1099 reporting! It’s quick and easy to visit the Senate website and the House website and use your zip code to find your representatives to Congress and tell them how you feel about this issue.

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17 Responses to 1099 Forms: Stop the Paperwork Avalanche

  1. Scrapbook Obsession August 19, 2010 at 3:30 am #

    Hi Nancy ~

    Thank you so much for the informative article. I had heard rumblings about this new requirement but didn’t really understand in a practical way until you explained it.

    I have two small home businesses, selling scrapbook supplies and doing medical/legal/investigative transcription. I’m small enough that I don’t see this affecting me personally – unless I have to buy a new computer (“Um, Apple, I’m gonna’ need a W4 and pronto!”) – as long as I remain vigilant about spreading out business purchases among various vendors so no one purchase meets the $600 threshold. A pain to say the least, but do-able.

    However, I really feel for all the businesses this will affect. It’s pretty crazy when you think about how far-reaching it is! I hope we’re all successful in getting these rules changed. With insightful articles like this, word will spread and that’s the best thing that can happen.

    Bravo to you!
    ~Erika

  2. Amy K August 19, 2010 at 5:15 am #

    Thanks for this info Nancy. We typically send out 6-12 1099s a year, just depending on our year, and because of our industry, I’m not sure this will have much impact on our business; however, I can see where this will greatly impact others! WOW!
    Great job, as always!

  3. tanya August 19, 2010 at 6:55 am #

    A W-4 is used for employees, generally a W-9 ise used for 1099able vendors

  4. tanya August 19, 2010 at 6:56 am #

    A W-4 is used for employees, generally a W-9 is used for 1099able vendors

  5. Carol August 19, 2010 at 9:33 am #

    Since I sell real estate I can imagine what this will do to the industry. This is horrible!

  6. Julie August 19, 2010 at 11:27 am #

    If I do not own a business, will I have to send out 1099 and get W-9′s if I purchase more than $600 as an individual? or is this only to LLC, contractors and Corporations?

  7. Kristina August 19, 2010 at 11:34 am #

    Wow! Thank you for providing us with that information that I probably would have never seen elsewhere. It’s not like I go looking for more ways to make running my business a pain in the a** but some one sure is!

    Thank you for spreading the word, I’m sure there are thousands more small business owners like me out there that are unaware.

  8. Melissa August 19, 2010 at 11:46 am #

    Thank you for the info. It is vital that this be repealed. What a nightmare!

  9. Lynn Mercurio August 19, 2010 at 1:41 pm #

    After reading this post (and most likely not really understanding it all) , I asked a colleague (I work in a tax department of a corporation) and he said that unless you are a business, this 1099 requirement does not apply. Thank goodness…the thought of having to get TINs from everyone I spent 600 with was S-C-A-R-Y. I do, however, feel sorry for those in our company who will be uber swamped with sending out hundreds if not thousands of these each year. I, on the other hand, will have the job of received the hundreds/thousands of these as I am the lucky person to file them all!

    Thanks for the update, Nancy!

  10. Amanda Sherman August 19, 2010 at 3:39 pm #

    Thank you for this article Nancy. You provided information much more clearly stated than I’ve found anywhere else in regards to this topic. We run a small business (although, not in the scrapbooking industry). This law has me so upset because of the need to get information from major retailers. Yeah, it will be so easy to go to Home Depot and say I’m not paying you until you give me this form. Congress has ZERO clue about how it implicates the small business. Yes, it will be a pain to send out the forms, but the gathering the information in the first place is the worst part. I think Congress is just setting out to destroy business. Plain and simple. If they can try to kill us with extra and useless paperwork, they will succeed in killing free enterprise.

    Okay – off my soap box.

  11. Steph H. August 19, 2010 at 4:20 pm #

    Thanks for the reminder. I just sent an email to my Senator and Congressman. What were the people who authored this one thinking? We’re in a recession and making it harder for businesses to survive is the LAST thing our government should be doing right now!

  12. Kelly August 19, 2010 at 7:09 pm #

    I am a tax accountant. I understand the importance of this law. The current rumblings are that this will portion of the healthcare reform act will be repealed before it takes effect. Yes, a business would use a W-9 to report their federal identification number. The drawback of the repeal is an estimate of $17 billion in unreported income by companies. That is a lot of money that is not being reported as taxable income by business.

  13. MichelleC August 20, 2010 at 1:17 am #

    I am not positive, but I think I read that transactions made by credit card would be exempt. When I had my business all of my purchases were made on a credit card from the manufacturers as well as any other purchases I made. I would guess most of the smaller companies do their purchases that way from the manufacturers. So if my recollection is right, it may have less of an impact.

    If I can locate the article I will send it to you. It was in one of my professional newsletters I receive.

    • Nancy Nally August 20, 2010 at 8:51 am #

      I just did some more research and you are correct. The earlier reading that I had done suggested that the credit card thing was part of a fix that had been suggested and that it hadn’t been done yet. I will edit the article accordingly. Thank you.

  14. Michelle August 20, 2010 at 6:06 pm #

    I was just coming back to link you to the article I had found: http://www.accountingweb.com/topic/tax/aicpa-asks-congress-repeal-new-1099-reporting-provision

    “IRS Commissioner Doug Schulman has indicated that some concessions are already in place. In a speech in May to payroll industry trade groups, Schulman explained that any transactions paid for with debit or credit cards will be exempt from the reporting requirements because a separate requirement on credit card companies for reporting credit card transactions will give the IRS the information it seeks. “Whenever a business uses a credit or debit card, there will be no new burden under the new law.” ”

    If nothing else, it may at least help many of the smaller businesses that would be affected.

    • Nancy Nally August 21, 2010 at 4:08 pm #

      Thank you Michelle. I appreciate it a lot. There seems to be a lot of confusion about this and the IRS is not helping much to clear it up in their official publications.

  15. Laura Piccioli August 22, 2010 at 8:16 pm #

    Thanks for the heads up Nancy! I usually just half listen to my tax preparer, and he made noises that we should be keeping better track of things, but this never seemed to be one of his concerns… as our inventory records have normally been very general. It looks like that may need to change for my little shop practices.

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