1099 Reporting Becomes More Onerous

Each year, businesses are required to provide a Form 1099 to any individual or unincorporated entity to whom that business paid $600 or more for services. Payments for services to corporations are exempted.  This reporting requirement was intended to bring independent contractors into compliance.  Of course the reasoning was that if payments are reported to the IRS, the recipient will be (much) more likely to report those same payments as income.  So, for now, a Form 1099 is required to be filed with the IRS only for payments made to individuals (or unincorporated entities) for services.  This is about to change.

Beginning in 2012, any business that pays a single vendor for goods or services valued at $600 or more must provide that vendor with a Form 1099, and this Form 1099 also must be provided to the IRS. 

Sounds simple, but what does this really mean?  If a business hires an accounting firm to prepare its tax returns, that business must provide the accounting firm with a Form 1099, which also must be provided to the IRS.  If that same business buys a computer for $600 or more from Costco, the business must provide Costco with a Form 1099.  Whether a business pays for goods or services – either to a corporation or individual, payments tallying $600 or more during a calendar year must be reported both to the IRS and the recipient on a Form 1099. 

What were they thinking?  Revenue.  The authors of the healthcare reform bill were searching for revenues to support the legislation, and this unlikely provision was added hastily.  Without proper consultation or discussion with the business community, this provision found its way into the healthcare reform bill and quickly became law.  Although the Joint Committee on Taxation estimated this new 1099 reporting requirement would bring in $17.1 billion over 10 years, this remains debatable.

Inventing ways to find new revenue sources is becoming commonplace in D.C.   In the last Congress, a provision requiring a 3-percent withholding on most all government contract awards became law under a similar scenario.  The effective date for that provision (on which we testified before the House Small Business Committee) has been kicked down the road a number of times but has not been repealed.

What can we expect?  While the law does not go into effect until 2012, efforts already are underway to repeal.  Just last week, failed attempts were made to repeal this provision in the Small Business Lending bill.  Even though this provision does not constitute a new business “tax”, its effects are the same.  Increased IRS reporting results in increased compliance costs, and this has a disproportionate effect on small businesses.  But even though the best answer is repeal, it is more likely that its effective date will be pushed off year-to-year (like the 3-percent withholding provision) – at least until someone identifies another source of revenue to replace the cost of repeal.