The 1099 is a form most commonly associated with freelancers and consultants, not businesses and employees, however that could soon all change.
With just a few short sentences in the 2010 health care act, the IRS form 1099-Misc just became the most important tax form in existence.
The New Purpose of the 1099-Misc
The 1099 has practically been re-purposed from top to bottom thanks to health care reform legislation.
Starting after December 31, 2011, the 1099 will function as a tax form for ALL business to business transactions of over $600.
Yes, for each and every b2b sale or combination of sales worth more than $600, each party will have to collect information about the other and submit a 1099 to both the parties involved and the IRS.
So, if your business were to purchase a laptop from WalMart for $600, you would have to fill out a 1099 form.
One of my greatest fears extends from the risk of identity theft, particularly for sole proprietors and owners of other small businesses who, unlike their larger competitors, use their own personal tax identification number (their social security number) for the business.
Unfortunately, these sole proprietors will have to give their social security number to most every one in order to comply with the law. Who wants to bet we see a huge number of DBA applications next year?
One industry was quick to turn against the new 1099 provision, the physical gold bullion dealers. And while they may have been very loud, and very “extreme” about the law and its effects, they did have a very good point: this law affects individuals as well.
You see, any and all transactions with a business are to be documented with a 1099-Misc form. Thus, if I were to walk into a coin shop after the law takes effect, it would be required of me to fill out a 1099-Misc and leave my tax identification number (my social security number) to sell the proprietor a single Krugerrand.
And while it is easy to defend the law on the basis that many companies and sole proprietors do have a “DBA” (Doing Business As) tax identification number, individuals are almost always dependent on their social security number.
To further drive the point: a number of states and municipalities require gold dealers and coin shops to copy the license of anyone selling gold or silver of a certain threshold value.
Consider, for just one moment, the possible dangers of giving someone your license (which has your address) and on a 1099 your social security number. Sounds like identity theft.
Let’s try to put this new law into perspective. Let’s say you own a hair salon in which you vend both services and products. In this hair salon you have probably 500 different hair, nail, and skin products, from 50+ different vendors. For each vender that sells you more than $600 of merchandise you’ll have to fill out a 1099.
Should you advertise your location and spend more than $600, you’ll have to fill out another. Should you buy ink, staples, pens, paper, etc to stock your business you’ll fill out even more 1099s. Then, when paying rent to your landlord, you’ll have to give them another 1099.
Not only will businesses have to fill out these 1099s, they’ll also have to keep track of each vendor to see when/if a 1099 is necessary. Remember, $600 or more in transactions with one vendor, service provider or business means a 1099 must be filed. However, the $599 in transactions before this $600 threshold need not be filed.
If one fails to file for transactions greater than $600, then the other party is expected to, by law, withhold 28% from the amount and forward it to the IRS. In order to receive full payment, the other party must submit a 1099.
1099 Repeal Attempts Have Failed
There have been several legislative attempts to end the new 1099 reporting requirements, but each has failed.
The process for repeal began in summer 2010 after a number of business groups led the charge for its removal from the 2009 Health Care Reform bill.
Since that time lawmakers in favor of overturning the provision have attempted to include it in a number of bills including the Food Safety Bill, Bush Tax Cut Extensions, and individually.
Advocates of the provision, however, have blocked the process, citing the $1.9 billion in new revenue the IRS/Congressional Budget Office expects from its passage. That $1.9 billion annually, or $19 billion over the ten year term, is to flow into a fund where it will provide for anti-tobacco, obesity, and other public health programs.
Maybe at the very least they could extend the January 31 deadline for sending the forms to those with whom you’ve worked. How about February 28?
You own a small business and are looking for a few thousand promotional pens. You could purchase from your usual supplier for $700, and you wouldn’t face any additional paperwork since you buy from them already. Or you could purchase from a new vendor for $690.
$10 to save yourself an accounting headache seems like a good deal. You avoid the necessity to spread your tax identification number to more people, and protect what should be private information from other parties.
Brutal honesty: it won’t be the most trusted, nor the highest paid people who will be collecting social security and tax identification numbers. It will be the people manning the front-lines of retail, service, and b2b account receivable departments who are in contact with your personal information.
Some Anticipated 1099-Miscs for Every Business
Off the top of my head, here are a few expenses for which I imagine most every business will have to file a 1099 in 2012:
- Cell Phone
- Internet Access/Website Services
- 1099 for paying an accountant – ha!
- Every commercial insurance policy
- Basic office supplies
- Advertising – Several Providers
The Growing Regulatory Burden
This didn’t happen overnight. The tax code doesn’t grow to more than 2.5 million pages (including accompanying regulations) in one day.
These regulations are not pro-growth, they are not sustainable, and they do create very important barriers to entry that tend to stiffle small business development and exploration.
Look at any of the recent highflyers: Zuckerburg and Facebook, or Andrew Mason at Groupon. Do you think either of these people had a clue about the tax code when they started? Do you think they needed to?
And would anyone want to answer as to why–if expansion of the tax/securities/regulatory code is good for business and the country–that the two businesses above (Facebook and Groupon) are doing everything they can to stay private and avoid going public to avoid more stringent accounting procedures?
I would imagine that this new law is eventually defeated before January 1, 2012, but at the rate Congress is headed, I’m not putting much stock in that prediction.
Notes: Actually starts December 31, 2011, so basically 2012.
I was recently made aware that business transactions of more than $600 paid for via credit or debit card would not require a 1099 since, as part of this HR 3221 bill, the transaction would already be recorded.
Other Tax Articles That Might Strike Your Fancy:
Changes to the IRS Cost Basis for 2011, 2012, 2013
$2500 College Tax Credit Explained
1603 Alternative Energy Grants and Bonus Depreciation