I wrote a post on the coming 1099 Nightmare back in August. I’ll include that information here again and update it for some new changes that are in effect as of January 1, 2011 for those of you owning rental properties. The worst of the changes kick in January 1, 2012 and will require you to do some things this year to get ready for it.
Rental Property Owners
In the past, in your business, if you paid someone (not a corporation) $600 or more for services, you had to send them a 1099 at the end of the year. Starting January 1, 2011, if you own rental properties, you will need to start tracking payments totaling $600 or more for services paid relative to your rental properties. That means if you hire an electrician or plumber to do some work and the labor portion of the bills totals $600 or more, you’ll now need to send them a 1099 in January of 2012 for the payments made in 2011.
You’ll also need to collect a W9 from them verifying their federal tax identification number. Failure to file the 1099s or collect the W9s can result in expensive penalties. But wait, it gets better … read the next section for business owners.
Business Owners
Ah, hiding in the 2,409 page document they call the health care reform bill was a little noticed provision about 1099s. Make sense right? Health care and 1099s.
This is a dangerous little piece of legislation that will bury small business in paperwork and administration. The Cato Institute calls it a “costly, anti-business nightmare.” I tend to agree.
The last thing you need is more taxes and more regulation. Well this “little” regulation will do nothing to help small businesses weather the current economic storm.
This new law will change the whole 1099 reporting system on January 1, 2012. First, you’ll now have to track not only payments for services of $600 or more but also the purchase of tangible goods from any vendor totaling $600 or more! In addition, you’ll be sending 1099s to corporations.
Think about what that means. Buy that brand new iMac computer and send Apple a 1099. Buy office supplies from your local office supply store, send them a 1099.
The really big headache will be collecting and documenting all those names and taxpayer identification numbers for every vendor that you do business with. Think about the size of that project! You better start collecting IRS Form W9 from each vendor you buy anything from. Don’t wait until 2012, you’ll have enough problems trying to track the payments.
Yes, you’ll need to track the amount paid to each and every vendor since you don’t know whether you’ll go over the $600 amount. Are your records good enough to do that? How about when you pay a credit card bill? Do you only list each category of expense, or do you pull the vendor of every line item on the credit card bill and list it in your accounting system? Not sure I’ve ever seen anyone do that. I expect we will see some updates during 2011 to programs such as QuickBooks to enhance their functionality to capture such info. Be prepared to update your software this year.
What about just ignoring this law? What about not worrying about it until it’s too late and not having the information you need to file accurate 1099s? As I read it, you can be penalized up to $250 per 1099 by the IRS and depending on the state you are located in, maybe another $50. Let’s see, $300 per 1099. Seems a little draconian to me. You better meet with your tax and business advisors and get prepared now. Too many will wait until next year and then there won’t be enough professionals available to help you.
Does Washington want your business to succeed, or just to pay tax and fill out paperwork all year long? Guess I’m not impressed with what’s landing on the laps of small business. Thankfully some in Congress are trying to get this repealed. Let’s hope so, although there have been two attempts at repeal already and sadly both have failed. Call your Congressman today.
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