One method the IRS uses to ensure that income is being reported is to cross check it against information returns filed by third parties reporting the income. As the “tax gap” (the spread between taxes actually collected and what should be collected) has grown, the government has created new reporting rules. Here are three new 1099 rules that could affect you and your business.
Reporting of Goods and Services
Starting in 2012, businesses of all sizes -- there is no small business exemption -- must start to report their payments for goods and services of $600 or more. This provision, which was a funding mechanism for the Patient Protection and Affordable Care Act of 2010 (“Obamacare”), has come under considerable criticism by business leaders as well as Congressional members and those in the Administration. It is an administrative nightmare! As a small business owner you will have to track payments to all firms you do business with, obtain their tax identification numbers, and then issue a 1099 to them.
While several attempts in the fall of 2010 to repeal this rule failed, most observers expect the rule to be repealed soon. However, businesses should get ready for this reporting rule in the event that it is not repealed. This means:
- Changing accounting systems to track payments to vendors, suppliers, and other companies you do business with.
- Obtaining reporting information from these parties (e.g., tax identification numbers, addresses, etc.). It is not clear when dealing with one store in a chain whether the return must be issued to that store or corporate headquarters; no IRS guidance has been issued.
- Obtaining a tax identification number for yourself if you are a self-employed person. This will help to preserve your privacy so your vendors do not see your Social Security number.
- Planning to cross check 1099s issued to you against the income you actually received.
Implication: If the rule is not repealed, businesses will have substantial administrative costs for compliance. These costs will either have to be absorbed or passed on to customers. Note: If this new rule is repealed, businesses will still have to report annual payments to independent contractors of $600 or more; this rule is not under consideration for repeal.
Reporting of Credit Card Transactions
Starting with transactions in 2011, banks and other payment settlement companies processing credit cards, debit cards, and electronic payments (such as PayPal) will have to report annually to the IRS the gross amount of merchant (seller) transactions. Sellers with annual gross sales on their merchant accounts of no more than $20,000 or 200 or fewer transactions are exempt from this reporting; only those with annual gross amounts exceeding $20,000 and with more than 200 transactions will have their transactions reported to the IRS.
There is a new form 1099-K, Merchant Card and Third-Party Payments (PDF), that will be used to report these transactions. According to regulations, gross amount of merchant card payments reported on this form do not take into account any adjustments for credits, cash equivalents, discount amounts, fees, chargebacks, refunded amounts, or any other amounts. Sellers will have to enter on their returns the full amounts reported to them. The reporting, of course, does not prevent sellers from making subtractions from the amounts reported to reflect chargebacks or other differences in what is actually taxable to them.
Implication: Many online sellers who assumed that their sales were under the radar will not be able to avoid reporting income.
Reporting of Services to Landlords
Also starting in 2011, there is a new 1099 rule for landlords who are not in a trade or business. Even owners with a single property must report payments of $600 to service providers, such as painters, plumbers, management agents, and accountants. This new rule is the same one that has applied for many years to businesses; Form 1099-MISC is used for this purpose. Landlords will have to provide these information returns to service providers by January 31, 2012, as well as to the IRS on that date (or by February 29, 2012 if they file electronically).
Implication: Landlords who claim a rental loss deduction will be somewhat restricted in the expenses they claim; the IRS can cross check their expenses against the 1099s.
More information reporting means more administrative work, which costs businesses money. Financial institutions that now have to issue returns for payment transactions will have to increase their fees in some way; businesses and consumers ultimately will pay the price. Whether the new reporting burden on businesses will be repealed remains to be seen.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.