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Self-Employed? Say Hello to Your New Best Friend in 2012: IRS Form 1099 [Commentary]

Tuesday, May 18, 2010

Posted by Kristie Arslan – Found deep within the new health reform law is a little known provision that will increase tax regulation on America’s small businesses beginning in 2012.  Yes, that’s right.  Not only did our policymakers pass a health reform bill that will provide little to no bottom-line savings for the self-employed and micro-businesses, but they paid for a portion of their “reform” efforts by heaping additional IRS reporting requirements, paperwork and fines onto the backs of our nation’s job creators. 

The IRS currently has a reporting requirement for businesses who hire independent contractors.  If a business hires a contractor, and pays them more than $600 in a tax year for services, the business must file a Form 1099. One copy of the Form 1099 goes to the contractor to remind him/her that taxes must be paid on the amount of income received. Another copy goes to the IRS which utilizes the form to ensure that the contractor accurately complies with the tax code by paying the proper amount of taxes on income.

As of 2012, this Form 1099 reporting requirement is being expanded to all businesses.  Every business will be required to issue a Form 1099 to any vendor of services or property to which the business has paid more than $600 in a tax year for those services or property.  The Form 1099 must also be sent to the Internal Revenue Service.

The payments that are included under this new regulation are not only those made directly by check but also those made by other means such as credit cards.  According to the Small Business Legislative Council, basic business expenses such as airlines, hotels, rental cars and restaurants that appear on your credit card bill are all subject to this new reporting requirement. You might not think of them as vendors of goods and services, but they are and they must be accounted for under this new reporting requirement. Also, if you are in the business of selling or distributing goods, all of your suppliers of products are also vendors under the new law.

In addition to issuing the forms, a business will have to get Taxpayer Identification Numbers (TINs) from all of those vendors and withhold payments to any such vendor until it receives the TIN.  This added withholding requirement will be a huge regulatory burden for the self-employed and micro-businesses, of which many manage their own accounting and tax preparation. 

Should a business not file the proper Form 1099s, significant penalties will apply.

Come 2012, businesses will face increased paperwork, increased cost, and increased time away from growing their business due to the expanded Form 1099 reporting requirement.

The focus of Congress and the Administration should be to provide relief to largest segment of small businesses - the self-employed and micro-businesses (fewer than ten employees) - while also fostering policy that encourages prospective entrepreneurs so that we may spur innovation and growth within our economy.  Yet, this new regulatory burden is just one example of what seems to be systemic behavior by our policymakers of publicly touting the importance of small business in this economic climate while they quietly issue backdoor rules and regulations that are ultimately pulling the rug out from under America’s entrepreneurs.  

 

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