On March 23^rd of this year, President Obama signed the Patient Protection and Affordable Care Act (PPACA) into law.  This massive healthcare legislation was over 2,400 pages long and included language around 1099 filing requirements which, if not repealed, will place an enormous burden on small business owners.

Historically, and through December, 2011, under § 6041 of the Internal Revenue Code (IRC), persons engaged in a trade or business who make payments totaling at least $600 to another person in a single year are required to file an information return (typically a Form 1099) with the Internal Revenue Service (IRS) and to provide the payee with a copy.[1]  Payments made to corporations (other than legal fees) and hospitals / extended care facilities, however, were excluded.  The new language removes the exclusion, requiring that a 1099 be issued to each “person”, including corporations.

In addition, IRC § 6041(a) specifies a list of payments that can trigger its information reporting requirements.  For payments made before January 1, 2012, these include “rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income.” If the aggregate amount of these payments to a single payee equals $600 or more, then IRC § 6041(a) requires the payer to report the amount of those payments and the identity of the payee to the IRS.[2]  The new language has been modified to include “amounts in consideration for property” and other “gross proceeds”.

The reality of these changes is that small businesses will now need to obtain Tax ID numbers and complete 1099s for ANY VENDOR that they pay more than $600 to throughout the year.  In other words, if you buy a new laptop from Best Buy, you’ll need to issue a 1099 to them.  If you use Verizon for your office phone system and spend more than $600 over the course of the year, you’ll need to issue a 1099 to them as well.  Given that it takes an estimated 16 minutes to prepare each form[3], the increase in required forms will require a significant amount of time investment on the part of the businesses that need to process them.  In addition to the time spent, there will be corresponding increases in paper, toner, postage, etc.

The fines for inaccurate or incomplete filings are per 1099 and could add up quickly.  If the Small Business and Infrastructure Jobs Tax Act (H.R. 4849) passes in the Senate and the White House, the calendar year maximum penalty for small businesses could reach as high at $500k. 

The increased reporting burden means that it will be necessary to obtain a tax ID number for any vendor you do business with and maintain that data in your accounting records.  There is already talk of repeal, but in the event that it doesn’t happen, it’s best to start planning now.  Review your vendor files and begin to accumulate EINs for your recurring vendors.  Require an EIN as part of your new vendor set up process, and enforce the requirement.  In the event that you do need to issue 1099s under the new rules in January 2012, you will be glad that you have the data you need available.