Found deep within the new health reform law is a little known provision that will increase tax regulation on all of America's businesses beginning in 2012. Who will be hardest hit? You got it...small business.
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.
In their rush to find funding to pay for their health reform efforts, Congress decided to expand this form 1099 reporting requirement which will heap additional paperwork and fines onto the backs of our nation's job creators.
As of 2012, every business -- big and small -- 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, regardless of the method of payment. A copy of the Form 1099 must also be sent to the Internal Revenue Service.
According to the Small Business Legislative Council, basic business expenses such as airlines, hotels, rental cars and restaurants will all be subject to this new reporting requirement. Also, if you are in the business of selling or distributing goods, all of your suppliers of inventory are also vendors under the new law.
What does this mean to a small business in terms of paperwork? According to a survey conducted by the National Association for the Self-Employed (NASE), micro-businesses (fewer than ten employees) issue approximately two to three Form 1099's to independent contractors under the current reporting requirement. Under the new expanded regulation, these businesses have estimated that they will have to issue roughly twenty-seven Form 1099s, mostly to large corporations. This is a 1250% increase in the amount of paperwork that will be required of small business come 2012.
In addition to issuing form 1099s, a business will have to get Taxpayer Identification Numbers (TINs) from all qualifying vendors. Should the business owner be unable to do so, they would be required to withhold a portion of that vendor payment and send it to the IRS. With over 40 percent of NASE's survey respondents still preparing their taxes on their own, this added administrative workload will significantly increase the time business owners spend on paperwork and/or force them to hire an accountant, adding to the cost of doing business in this difficult economic time.
Should a business not file or inaccurately file their form 1099s, significant penalties will apply.
It seems some Members of Congress have begun to see the error of ways and have taken steps to introduce legislation (Small Business Paperwork Mandate Elimination Act of 2010, S.3571/ H.R. 5141) which would repeal or modify this onerous regulation.
Let's hope this debacle serves as a good lesson to our policymakers that it is imperative they fully examine the impact of their funding mechanisms and other legislative provisions prior to rushing to pass their policy priorities. Quite simply -- read the bill and make sure you know what it does before you vote YEA!