New 1099 Headache
Heath reform law hides massive change in 1099 reporting
A few lines buried in the 2,409-page Patient Protection and Affordable
Care Act of 2010 (the new health reform law) will require U.S. companies
to issue 1099s to every business where they spend $600 or more, not
just individual contract workers. Starting in tax year 2012, the law
expands 1099 coverage to tangible goods and services, thereby also
expanding not only reporting but data collection for every payee and
vendor with which companies do business throughout the year.
The IRS estimates that the federal government fails to collect
$290 billion a year in tax revenue on income that is not reported. “This
new reporting requirement boils down to closing the tax gap,” says John
W. Roth, senior tax analyst at CCH, a Wolters Kluwer business. “When
third parties are required to report, compliance increases,” he says.
“Now, transactions previously considered a routine part of doing
business will need to be reported to the payee as well as the IRS,” Roth
says. For example, under the new rules, a freelancer who buys a new
computer from the local Apple Store will have to send Apple a 1099. A
company that buys raw materials used in its manufacturing will have to
track those purchases throughout the year and send all of its suppliers a
1099 by Jan. 31 that tallies the total spent.
Some details still need to be worked out, Roth says. For example, will a
$599 purchase cross the threshold because of state sales taxes, excise
taxes or surcharges? “The IRS has been silent on this so far because of
higher priorities, such as the health care mandates and tax changes that
will affect tax year 2010.”
The year 2012 seems like a long way off, but because the new 1099 rules
pose such a procedural burden, it’s a good idea to start thinking
through the issues involved.
“Corporations will need to figure out how they are going to track all
this and compile it at the end of the year so they can file 1099s in a
timely way,” Roth says. “On the flip side, companies will need to track
1099s as they come in, to make sure they get to the right person and
onto the tax return.”
The effort to obtain a valid tax ID number from each of your payee's will be massive. In addition to obtaining the valid ID from your vendor's all of your clients will want the information from you.
