In order to pay for the health care benefits of the Patient Protection and Affordable Care Act (PPACA), the scope of Form 1099 was considerably extended by PPACA Section 9006. Internal Revenue Code Section 6041 currently contains numerous exceptions from Form 1099 reporting requirements. In general, current 1099 reporting covers only services paid to individuals and partnerships. Absent the IRS making regulatory changes, after the PPACA change becomes effective, no meaningful exemptions will exist. If a vendor receives more than $600 in total during the year, a 1099 will be required.
The additional 1099 reporting is effective for payments made after December 31, 2011.
Take a moment to absorb the day-to-day impact of this. Here are examples of transactions that previously did not involve 1099 reporting, but which will be required under the PPACA. For each of the following, your business will need to collect a taxpayer identification number (TIN), address, and other information for a proper 1099, and then send a completed 1099 shortly after the calendar year is over:
- You travel out-of-town and pay more than $600 for a hotel room.
- You occasionally order sandwiches from the local deli so that employees or clients can “work through”. Although each payment is no more than around $20, the aggregate paid throughout the year exceeds $600.
- In a series of smaller purchases, the office manager purchases more than $600 of office supplies from a vendor over the internet.
- You pay more than $600 per year to a bottled water vendor who makes delivery to your office.
- You purchase a few office chairs from a local retailer for a total of more than $600.
- You purchase gas for a business automobile from certain gas stations, the total of which are more than $600 during the entire year.
- You pay more than $600 throughout the year in shipping or delivery changes to a single vendor, even though each individual charge may be no more than $15.
In essence, the role of Form 1099-Misc is changing from tracking off-payroll employment to reporting that accompanies virtually any business transaction of over $ 600 in a calendar year. The only good news is that you no longer need to wonder whether the complicated 1099 rules require reporting. Once the PPACA rules take effect, if it is more than $600, 1099 reporting is required.
Your business is certainly not now performing the work necessary for the above data accumulations and subsequent tax reporting. If not built into your routine processes, the required accounting would be near impossible to perform timely and cost-effectively. To avoid a bureaucratic nightmare, this tax requirement requires long-term thinking. The biggest headache is likely to be data collection of a name, address, and TIN for every payee and vendor. Even though this requirement is not yet effective, businesses should start with the following to allow a smooth transition:
- Ensure that your accounting systems have the ability to track payments by vendor, and record the TIN for each. The accounting software should also have a routine or interface that allows computerized preparation and printing of 1099s. Software that does not have these functions will need to be upgraded.
- Clean-up master accounts payable files to consolidate duplicate vendor accounts. This will ensure that data is being recorded correctly and in a single spot, and unnecessary time is not spent collecting multiple W-9 forms (see next point).
- Begin to request and record address and TIN information for active vendors. The preferred way of capturing this information is on is on Form W-9.
- For vendors that are typically paid with credit cards, obtain an address and TIN so that 1099 reporting can occur. Since credit card payments are rarely accumulated by vendor in most accounting systems, a method will need to be developed for accumulating payments to each credit card payee. Inquire whether your credit card issuer has a means of facilitating such data accumulations.
- For vendors that use lockboxes do not rely on the “remit to” address of the bank. You will need to obtain the vendor’s address to which the 1099 should be sent.
Do not think that the law can be ignored. If a vendor refuses to provide a TIN, the payor is required to withhold 28% of the payment on behalf of the IRS. Since no payor wants to bother with this withholding, most businesses will simply refuse to make a payment until the vendor provides the W-9 information.
If you are a payor, ignoring the 1099 reporting can be painful, as follows:
- There is a $50 fine per occurrence for failure to prepare and file each 1099.
- The payor can be held responsible for the 28% backup withholding (see above) that should have occurred. In other words, the payor is held responsible for the payee’s taxes.
As part of the PPACA cost estimating process, the additional 1099 reporting was estimated to raise $17 billion of taxes over 10 years. It is possible that the IRS will soften the reporting burden through regulation, but the IRS is not likely to give up the possibility of raising serious money like this. Similarly, those who passed the PPACA were hopeful that this 1099 reporting would be an important means of reducing the PPACA’s cost. It will be difficult for those who passed the health care legislation to acknowledge that the net cost of the health care bill is actually greater.
Republicans have focused on the reporting burden. Representative Dan Lungren (R-CA) already introduced legislation entitled the “Small Business Paperwork Mandate Elimination Act” to repeal the new 1099 requirements. The bill has numerous House cosponsors, but every one of the cosponsors is a Republican. This indicates a nearly impossible chance of passage unless makeup of Congress changes significantly.