Over the next two years, the requirements for issuing Forms 1099 will be increasing significantly. The 2,409-page health reform bill included a significant change in the filing requirements for a 1099-MISC. This one change will likely require that hundreds of millions of additional 1099s will be issued each year. This requirement does not, however, take effect until 2012.
The first expansion of 1099 reporting was enacted in 2008 and goes into effect in 2011. This one even generated a new offspring of the 1099 series, the 1099-K. This form requires reporting by financial firms that process credit or debit card payments. Fortunately, the threshold for reporting is rather high, so it should not have a massive effect until the limits are lowered. A 1099-K must be issued by the card processor to any merchant having at least 200 transactions totaling more than $20,000 in any given year. To put this in simpler terms, Bank X processes credit cards for Joe’s Car Wash. Over the course of the year, Joe has 10,000 credit card transactions totaling $60,000. Bank X must issue Joe a 1099-K for the amount of these credit card payments.
But let’s bring this closer to home. You sell merchandise on eBay and accept payment through PayPal. If you have over 200 transactions in a year totaling $20,000 or more, PayPal will issue you a 1099-K. IRS Commissioner Doug Shulman stated that this gives the IRS a tool to reduce the tax gap and provide better documentation for the business taxpayer to report their income and expenses. In other words, the IRS is going to collect more tax.
The 1099 provisions included in the health reform act have a number of important, far-reaching consequences. At present, a business must report certain payment to individuals for services rendered when those services equal or exceed $600 in a given year. There are two important words in that previous sentence – “individual” and “services.” Payments to corporations and payments for merchandise do not currently require 1099 reporting. However, that is about to change.
Under the new rules, any business making any payment to a corporation or other business must issue a 1099 when the amount paid to the vendor is $600 or more in a given year. This includes not-for-profit organizations. You have a small Schedule C business and you buy your office supplies from Staples. Buy more than $600 per year, you must issue Staples a 1099. Buy a computer from Dell, send them a 1099.
This means you must obtain the tax ID number for anyone you buy from and you must supply your TIN to your business customer. You don’t have the TIN number? That’s OK; you can overcome the problem by doing backup withholding. This simply means you withhold 28% federal income tax on the payment. So you buy $1,000 of merchandise from a vendor. You don’t have their TIN. Send them $720 and remit the balance to the IRS. But what if you buy $500, then later in the year you buy another $100 from a company and don’t have their TIN? Better get the TIN. If anyone thinks that all businesses are going to file all of this properly and the IRS is going to process it correctly, I have a bridge I’d like to sell you.
A second problem I foresee with this is that the requirement is that gross proceeds be reported. This is going to create a couple of issues. I sell an item for $1,000 that cost me $600 for a $400 profit. Only the $1,000 gets reported to the IRS. They don’t see where I report it, so they send me a bill for tax on $1,000 – similar to the existing scenario with Form 1099-B. A second issue is how is the IRS going to sort out my $100,000 in sales between what is reported on a 1099 and what is not reported.
A third problem is the undue burden this requirement places on businesses. This is going to require small businesses to keep better records (not a bad idea, incidentally) and incur significant expense in tracking and reporting these payments. Many small businesses are likely to turn to bookkeeping and tax preparation firms for the record-keeping and form preparation.
This is not something companies can ignore and hope it will go away. The risk is too great, as the penalty for not filing a proper 1099 is $50 per form for an inadvertent failure and $100 per form for intentional failures. Those penalty dollars can mount up quickly. A company that does not properly use backup withholding when required can be held liable for the amount required to be withheld.
If there is any good news in this, it is that these new requirements do not go into effect until 2012, so companies have over a year to get ready for them.