The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as for services. That sounds like a technicality, but it’s got small business up in arms.
Here’s why it matters, and what you need to know.
What exactly is the rule, anyway?
The new rule requires all business to file 1099 forms for goods as well as services, if those goods cost over $600 annually (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did. The rule is slated to go into effect in 2012.
Who will it affect?
It will affect all businesses, including sole proprietors, consultants, self-employed people and freelancers, who are considered businesses for tax purposes, but may not think of themselves that way. It also will apply to charities and other tax-exempt organizations. The National Taxpayer Advocate, based on Internal Revenue Service data, figures that it will affect 26 million sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farms, 1 million charities and other tax-exempt organizations, and likely more than 100,000 federal, state and local government entities. All told, that’s more than 38 million taxpayers and taxpaying entities.
What does it mean?
It means that you’d better be ready to track your spending by vendor, and have an easy way of tallying up whether that spending totals more than $600 per year. A business that spends $20 a week on pizza for its employees, for example, would spend a total of $1,040 a yea r— and would need to file a 1099 form to that local pizzeria.
The recordkeeping complexities are mindboggling, and there are still a lot of unanswered questions about how this new rule might be implemented. Internal Revenue Service Commissioner Douglas Shulman has said that the agency will look to exempt transactions done with credit or debit cards. While a credit-card exemption would provide significant relief to many small businesses, it could create its own recordkeeping issues (businesses would then need to distinguish between payments made by card and those done by cash or check to the same vendor) and it could also wind up unintentionally hurting businesses that do not accept credit cards.