“Beginning for payments made after December 31, 2011, companies will be required to furnish and file form 1099-MISC for payments made to all for-profit companies regardless of corporate status. In addition, all payments for goods, materials, merchandise, supplies and other property will need to be reported as well.”[1]

WHY WAS THIS DONE?

President Obama promised that the Health Care Reform Bill would not increase the deficit. Hence, within the Bill are revenue raising measures to offset the cost of the legislation. This change to the use of 1099s is one of them.

“The idea seems to be that using 1099 forms to capture unreported income will generate more government revenue and help offset the cost of the health bill.

A Democratic aide for the Senate Finance Committee, which authored the changes, defended the move. ‘Information reporting improves tax compliance without raising taxes on small businesses,’ the aide said. ‘Health care reform includes more than $35 billion in tax cuts for small businesses ... indicating that during these tough economic times, Congress is delivering the tax breaks small businesses need to thrive.’[1]

The IRS estimates that the federal government loses more than $300 billion each year in tax revenue on income that goes unreported. Using 1099s to document millions of transactions that now go untracked is one way to begin to close the gap.”[1]

WHAT DOES THIS MEAN FOR YOUR BUSINESS?

These changes will affect your record keeping and general financial records. You will have to obtain tax ID information from all your vendors to have the needed data to enter on the 1099.

These changes radically alter the nature of 1099s and means businesses will have to issue hundreds of new tax documents each year. Just in case you are thinking that this change can be ignored, there is a huge increase in the penalties:

“The monetary risk is expected to increase[s] significantly. Where [until now,] companies were experiencing b notice fines at the following levels:

• $50 per each supplier that is not properly reported
• $250,000 maximum potential risk per company

The new legislature [ion] increases the levels to:

• $250 per each supplier that is not properly reported
• $1.5M maximum potential risk per company, although some sources have indicated that this number could be higher.” [4]

“‘It's a pretty heavy administrative burden, particularly for small businesses without large in-house accounting staffs,’ says Bill Rys, tax counsel for the National Federation of Independent Businesses.

The notion of mailing a tax form to Costco or Staples each year to document purchases may seem absurd to small business owners, but that's not the worst of it, tax experts say.

Marianne Couch, a principal with the Cokala Tax Group in Michigan and former chair of a citizen advisory group to the IRS on small business and self-employed tax issues, thinks the bigger headache will be data collection: gathering names and taxpayer identification numbers for every payee and vendor that you do business with.

But she also sees a silver lining in the new law. Her firm already recommends collecting tax data on all vendors, since the IRS requires that you have it on hand at the time of the transaction, not just at tax-filing time. And eliminating the corporate and goods exemptions at least means that businesses will no longer have to pour over every transaction to determine if it needs a 1099. The new rule is simpler: If it crosses the $600 threshold, it's in.

‘There are probably going to be some hiccups along the way, because systems will need to be redesigned,’ says Couch. ‘But overall I believe it will make compliance on the payor end a lot more streamlined and easier.’”[1]

WHAT YOU CAN DO TO PREPARE

In 2011, start requesting that each of your vendors complete IRS W-9s (these can be downloaded from the IRS web site, copied and faxed or mailed to your vendors) for your records.  These completed forms will give you the legal name, address and Tax Identification Number (EIN or SSN) for your vendor. [PLEASE NOTE: if you are a sole proprietor business and are still using your SSN as your business ID number, I strongly suggest that you file for an EIN to safeguard your SSN. This is done easily at the IRS website]. If you start early, the job will not seem as onerous,. The information on the W-9 is what you will need in order to complete a 1099-MISC each January for the previous year’s activity.  It is much easier to request and receive this information before your vendor has been paid rather than months after the fact. The 1099-MISC forms are due to the recipient by January 31 of the following tax year in which the work was done or the item purchased. A copy is due to the IRS by the end of February.

You should also know that you do not need to go to office supply stores to purchase the 1099s. They can be obtained free from the IRS website (www.irs.gov). On the opening page, click on “Forms and Publications” on the left-hand side. On the next page look for the “Order” section on the lower left. Order them in December for the current year forms. Dec 1 is the separation date for determining what “current year” means to the IRS. If you order forms before Dec 1, 2012, you will get 2011 tax forms, so what you need to order are 2012 forms AFTER Dec 1, 2012. If you need more copies than the website provides, call 1-800-829-3676. Currently, I order over one hundred per year for my clients; that amount will surely go up drastically in 2012.

If you do not have your financial system computerized, do so well in advance of 2012. Computerizing your finances will make complying with the law much easier. With QuickBooks Accounting software, you can enter all your vendors and their information (that you collected on those W-9s). Then QuickBooks can print your 1099s for you, drawing on your accounting information to get the total amount you spent with that vendor. QuickBooks also automatically screens vendors to see if they meet the $600 amount. To do all this manually would be a nightmare. If you are not computerized, I can help you computerize your accounting system and teach you, or your bookkeeper, how to use it.

Other issues with which I can help:

• If you do not know whether your QuickBooks is set up properly to issue 1099s, I can check your set up and, if necessary, correct it.
• If your accounting software does not print 1099s, I can issue them for you on my own system. There is no need to change your current accounting software.
• Any other questions you may have concerning 1099s.

BE AWARE, THIS COULD CHANGE

The provisions for this change in the use of the 1099-MISC form are not absolutely certain to be implemented in their current form, especially since the provisions do not come into play for several years. So look for more changes to come. For example, Representative Dan Lungren, R–CA, has already introduced a measure to repeal the 1099 changes. However, since these 1099 changes are such a clever way to raise revenues by capturing hitherto unreported income, the 1099 rules will probably be kept in some form.

Finally, while these changes are not immanent, it would be wise to plan ahead for their eventual implementation. I will keep you informed in my future newsletters about significant changes to 1099 tax reporting when they occur.

If you are interested in exploring this topic more deeply, you can Google: “2012 1099 changes” and you will get these two articles and much, much more..

As of April 14, 2011, the government has repealed the requirement to report purchases from corporations (whew!!), but payments to individuals (over $600 in a calendar year) still must be reported. The government has also retained the new, higher penalties for non-reporting, so if you are in doubt, err on the side of sending more 1099s to protect your business.