[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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