The National Association for the Self-Employed reports that the recently enacted Healthcare law will have an onerous record-keeping effect on small businesses:
Many of the nation’s entrepreneurs are about to become more familiar with IRS Form 1099. According to a new law set to go into effect in 2012, business owners will be required to submit a Form 1099 for every payment made via check or credit card to vendors for services, inventory or property over $600 annually. A new survey by the National Association for the Self-Employed (NASE) found that the self-employed and micro-businesses (those with fewer than 10 employees) are overwhelmingly expecting this new regulatory burden to greatly or somewhat increase the amount they spend on tax preparation.
The Form 1099 reporting system has historically been utilized for payments made to independent contractors. According to NASE’s survey, micro-businesses reportedly received an average of four Form 1099s from clients or customers and issued an average of two Form 1099s to contractors in the most recent tax year. Under the new expanded regulation, small-business owners have estimated that they will have to issue roughly 27 Form 1099s, mostly to large corporations. This is a 1250% increase in the amount of paperwork that will be required of small-business owners come 2012.
This law, of course, is pure insanity.¹ There are two primary reasons Congress has never before required that Forms 1099 be issued to corporate vendors: 1) it would impose an absurd burden on small businesses; and 2) it would provide only nominal assistance to the IRS in determining whether or not a corporate taxpayer has reported all of its income in a given tax year.
The first reason is obvious and needs no further explanation. The second requires explanation through example:
The Michael Scott Paper Company is an “S” Corporation that has average gross sales of $1,000,000 over the last ten years. In a typical tax year it supplies about 400 small businesses with paper and other related supplies. The annual billings to these customers range from $200 to $10,000.
Under the new 1099 rules small businesses that buy more than $600 worth of merchandise from Michael Scott during the year will be required to issue a Form 1099.
Michael Scott files it’s 2010 Form 1120s reporting $1,095,000 of sales, $198,000 of which was attributable to customers who purchased less than $600 worth of product during the tax year. These customers were not required and therefore did not issue Forms 1099 for the amounts they paid Michael Scott in 2010.
Michael Scott could have underreported it’s income in 2010 by $198,000 and still have passed muster under the IRS’s 1099 matching program.
This example illustrates that because a corporation has income from many sources, some of which are not required to file Forms 1099, rare will be the case when the total of the Forms 1099 filed with the IRS for a particular tax year will be more than the amount of gross receipts reported by the corporation on its annual corporate tax return.²
The costs of forcing small businesses to issue 1099′s to its vendors and suppliers greatly exceed the nominal benefits to be obtained by the IRS and, therefore, the new requirement should be scrapped.
Footnotes:
¹ Here’s Chris Edwards of Cato:
Businesses will have to issue 1099s whenever they do more than $600 of business with another entity in a year. For the $14 trillion U.S. economy, that’s a hell of a lot of 1099s. When a business buys a $1,000 used car, it will have to gather information on the seller and mail 1099s to the seller and the IRS. When a small shop owner pays her rent, she will have to send a 1099 to the landlord and IRS. Recipients of the vast flood of these forms will have to match them with existing accounting records. There will be huge numbers of errors and mismatches, which will probably generate many costly battles with the IRS.
Private transactions are the core of a market economy, and the source of America’s growth and prosperity. Now the federal government is imposing a vast new web of red tape on perhaps billions of these growth-generating private exchanges.
For what purpose? So the spendthrift Congress can shake a few extra bucks out of private industry? The business sector is the generator of America’s high living standards, but most federal legislators just see it as a kitty to be raided or a cow to be milked dry.
I’m stunned that there wasn’t a broader debate before such a costly mandate was enacted. If it goes into effect, it will waste vast quantities of human effort in filling out forms, reworking computer systems, collecting and organizing data, and fighting the IRS. The struggling American economy can’t afford anymore suffocating tax regulations. This mandate is a giant deadweight loss. It should be repealed.
² The problem is compounded when you consider that most of these corporations, having inventories, are required to be on the accrual basis of accounting while the 1099 reporting program is purely a cash basis mechanism.
19 responses so far ↓
1 Michael // Jun 25, 2010 at 6:21 pm
I couldn’t agree more. The enslavement of private business for the gain of government is really getting out of hand. They want private businesses to spend great resources so the government can make minimal gains in increased taxes and penalties.
This type of nonsense kills the economy. The government overlords are basically saying they would rather have business spending their time on mountains of paperwork than in producing real goods and services which generate actual wealth.
2 IRS Requests Input on New Informatiion Reporting Requirements // Jul 1, 2010 at 7:02 pm
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3 Peter // Jul 1, 2010 at 11:59 pm
Michael,
Thanks for the comment.
I agree. Major distruption, minimal benefit to the government.
4 Senators Ask IRS to Streamline New 1099 Reporting Rules // Jul 13, 2010 at 8:39 pm
[...] – sent a letter Monday to IRS Commissioner Doug Shulman expressing their concerns about the new 1099 reporting rules: “The new requirements may place a hardship on small businesses by creating an extra paperwork [...]
5 billy Corbett // Aug 3, 2010 at 9:54 am
This is going to burden us even more. What can be done about this?
6 Peter // Aug 3, 2010 at 10:13 am
Billy,
Write your Congressmen.
7 eric // Oct 5, 2010 at 2:43 pm
Sounds like a way to put a lot people in more
danger of identity theft, since presumably all
this new paperwork will have your social on it
(being tax documents). The more paper floating
around with your SSN on it, the more danger.
8 New 1099 Misc Rules for Landlords // Nov 12, 2010 at 7:45 pm
[...] Do Tax Preparers Have a Duty to Examine Their Client’s Receipts?Repeal the New 1099 Law [...]
9 BOB CAFFEY // Nov 12, 2010 at 7:50 pm
You really don’t get it do you, because you get messed up in the details. I’m an outside Accountant and at first I thought how in the world am I going to do the work and get paid for this BS. and the IRS will not be able to cross check all this data anyway. Then I stepped back and asked why.
The answer is so simple (CONTROL) by the US GOVERNMENT in our lives by the SHITS I have met in IRS audits who were brainwashed to believe that everyone was a cheat. I have read since 1986 that the tax code is 72,000 pages long and 15,000 changes have been made since 1986 so who in the hell can understand the tax laws but an attorney from Phila, Pa. for a large fee.
It is a crime that taxes control such a large percent of business planing and the prices you pay on everything you buy.
So in the end we fall like all the CIV’s before us, inside and not from our outside foes. We let other nuts do the thinking for us and it’s like the Romans said, FEED THE MOB AND WE WILL ALWAYS HAVE CONTROL.
I love the USA because for the first time in the history of humans this country is trying to do the right thing for all of us, what ever color and beliefts, but there are so many humans that are still unfit to be human because of such hate of others that they are still insects.
The nuts we elect to govern us in most cases know how we think and the triggers to push to make us do things for their welfare and not ours.
Human behavior is such an old science and has been used for ever to control us.
In any case have a happy day and I hope you can still pay your bills because when you can’t you might wake up, with no power over your life.
Also I should warn you that what ever you post on this or any other web site is not secure and your telephone calls are not secure. If you don’t want anything to haunt you in the future keep your mouth shut and don’t write it down or post it.
You see the BS issues distract you from the real problem which is that in the end if we are not very careful the ones in control will make us mice
In closing I will say something I heard in a movie, some things are true if you it believe or not.
I know there are so many people in the world that have so little and also so many in the US that also have so little that I am ashamed of what I have which I think is so little, I live from day to day.
If you want to contact me my e-mail is starmaga@aol.com
Bob
10 Peter // Nov 13, 2010 at 11:26 am
Bob,
I have handled hundreds of IRS audits and have rarely felt that the IRS examiner started out with the assumption that my client was a tax cheat. I have found IRS auditors, for the most part, to be very fair.
You said: “There are so many humans that are still unfit to be human because of such hate of others that they are still insects.”
Are you channelling Kafka?
You said: “Also I should warn you that what ever you post on this or any other web site is not secure and your telephone calls are not secure. If you don’t want anything to haunt you in the future keep your mouth shut and don’t write it down or post it. You see the BS issues distract you from the real problem which is that in the end if we are not very careful the ones in control will make us mice.”
Why does the Twilight Zone theme play when I read your comment?
I don’t want to contact you via email because the government might be monitoring it.
LOL
11 Virginia Pea // Nov 14, 2010 at 2:39 pm
The 1099 requirement is evidence of how out of touch with business practices Congresspeople really are–a major causation of how our economy got where we are today. The 1099 requirement will unduly burden small business persons, many of whom are incapable of bearing the paperwork burden compliance would require. The only 1099 exception is for goods purchased with a major credit card: hey, let’s use more government resources to keep Citibank afloat. Let’s take the small business person struggling in a shaky economy and impose a new layer of bureaucracy on them, and let’s not think critically about how the failure of the ill equipped, ill prepared small businss person to comply will affect their respect for the taxation system. Especially let’s not think about what effective compliance will require: how many IRS staff hours to accumulate the data, the lost opportunity cost of having the small businessperson filling out meaningless paperwork instead of looking for business, let’s not think about the negative effect on voluntary compliance when the penalty notices come out for people who have failed to issue proper paperwork. Then, let’s make real sure to not critically think about what the compiled data will be used for: who will be matching what to what? Should we have a different 1099 for taxpayers reporting income on a fiscal year? A separate 1099 for accrual basis taxpayers? Maybe, and then let’s send each of the different 1099s to a different service center and impose a penalty on taxpayers who get the zip code wrong. It’s time to stop the madness and repeall this measure. Businesspersons should be gonig business. The taxperson should be auditing and collecting. This ill conceived measure is going to slow down business and government, but it will also hurt the general economy by requiring resources to be diverted from productive activity.
12 Holly // Dec 9, 2010 at 5:42 pm
Agreed. This is a huge burden for small business people because now we will have to hunt down SS#s, EINs, and appropriate address for all of these vendors. Did the IRS figure in the cost of their additional processing in the “savings” from this legislation??
13 Donna H // Jan 1, 2011 at 4:23 pm
I own a resale store. If I have to 1099 my consignors I will go out of business and 13 people will loose their jobs. I can’t afford to do it, I don’t have the time to do it, and who is going to consign with me if they are going to be taxed again on items they have already paid sales tax on? This is insanity!!!
14 Peter // Jan 4, 2011 at 12:57 pm
Donna,
Fear not. The Republicans will repeal this Nanny-state nonsense.
15 New 1099 Reporting Rules Given Last Rites? // Jan 21, 2011 at 10:18 am
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16 Dick // Jan 31, 2011 at 8:07 pm
I own a service business that regularly collects deposits from clients. We hold the deposits as Other Current Liabilities. When we have completed the work and are invoicing the client, we credit them for the deposits. But I am receiving 1099 forms that include the amounts paid as deposits, even though the work was not completed in 2010. Those payments are not income, so I suspect that they will lead to a mismatch. Need to check with my accountant, perhaps its ok.
17 David // Feb 12, 2011 at 4:35 pm
Is Wal-Mart, Target, Office Max, etc, really going to give us their EIN and reporting address????? What will the penalty be for not sending out the 1099′s we are not able to get info for?
18 Jared // Jun 11, 2011 at 4:23 pm
Interesting read on the downside of 1099s.
19 Richard // Jan 27, 2012 at 2:05 am
Well said David….What about when I spend thousands of dollars at my local Shell station at the pre-paid gas pump for our service vehicles? Wiil I need the EIN from the service station that sells gas or from shell? Will they post their EIN at the pump on my receipt?
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