1099 Filing Requirement in Health Care Reform Law

I read on FatWallet that a hidden gem in the new health care reform law will require a business to issue a 1099 Form to all vendors starting in 2012 if the business purchases $600 or more in goods or services in a year from that vendor.

Currently a business is only required to issue 1099s for payments for services, not goods, purchased from individual persons, not corporations, if the total payments to that person exceed $600 a year.

I find this quite unbelievable. Small business owners buying from Costco will have to send a 1099 to Costco at the end of the year. Because chain stores are often owned by different entities under a franchise agreement, a business buying from one store versus another under the same chain will have to track the corporate entities behind each one separately. What a nightmare.

Because it’s so unbelievable, I had to look up the laws myself. It’s amazing but true. Section 9006 of Patient Protection and Affordable Care Act says (the key phrases are in bold):

SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.

(a) IN GENERAL.—Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:
    "(h) APPLICATION TO CORPORATIONS.—Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).

… …

(b) PAYMENTS FOR PROPERTY AND OTHER GROSS PROCEEDS.— Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended—
    (1) by inserting "amounts in consideration for property," after "wages,",
    (2) by inserting "gross proceeds," after "emoluments, or other", and
    (3) by inserting "gross proceeds," after "setting forth the amount of such".
(c) EFFECTIVE DATE.—The amendments made by this section shall apply to payments made after December 31, 2011.

After all the insertions, the amended Section 6041(a) of the Internal Revenue Code becomes (the inserted words are in bold):

(a) Payments of $600 or more

All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.

Because I show ads on my blog and I sell my book, I’m considered as "engaged in a trade or business." Right now I don’t issue any 1099s since I don’t pay over $600 in a year for services from any individual person. All expenses are paid to corporate entities. Under the health care reform law, I will have a new 1099 reporting requirement starting in 2012.

Reference:

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Comments

  1. Edwin | Finantage says

    After reading the first paragraph I was geared up to look that up because it seems so silly. Luckily, you did the job for me but unfortunately its true. I wonder what the reasoning is behind this change. It seems like a very arbitrary way to make bookkeeping an even bigger pain in the ass for everyone.

  2. Harry Sit says

    Edwin – Please read the 2009 GAO report I linked at the end. This is one of the “close the tax gap” measures to make sure businesses don’t under-report their income or over-report their expenses. If a business received many 1099s from its customers, it has to at least account for all those income. If a business reported a lot of expenses on the tax return but didn’t issue nearly enough 1099s, the IRS may target them for audits.

    The GAO report said the Bush administration proposed the same thing. So I guess it has bipartisan support. Bookkeeping will be a pain for sure.

  3. Edwin | Finantage says

    Thanks for pointing that out, I didn’t bother going through the references assuming they wouldn’t add much. It seems that although businesses are already required to report these things, the lack of clarity and focus in the current law forced them to put it out in a more open place, at least that’s how I read the GAO report summary.

  4. Personal Finance says

    One thing I found in life is that small businesses have hurt a lot during the last 30 years or so because of the high regulations. Big businesses can afford where sometimes businesses, it can be life or death of the business.

  5. Jeff says

    Won’t this kind of regulation just help to foster a black market for goods and services between businesses?

    Otherwise, this just sounds like a regulation that will help entrench big businesses like Costco or Walmart (through Sam’s Club) because they’ll probably start to do the bookkeeping for the 1099 for small businesses with their account management. It’ll probably just get wrapped in their annual subscription fee to be a member.

  6. J says

    Section 9006 says that “the term ‘person’ includes any corporation .”

    Does this language exempt sole proprietors, general partnerships and the self-employed from the new 1099 requirements?

  7. JIm says

    The questions that need to be asked are what do these regulations have to do w health care and how will they help American businesses complete in the world market place.

    People complain that the republicans shipped jobs overseas.
    The democrats are crushing them right here at home.
    Both parties are corrupt.

  8. Harry Sit says

    J – That sentence refers to the recipient, not the entity making the payment. If a sole proprietor receives over $600 a year from a business, that sole proprietor already receives a 1099-MISC today.

  9. Jim says

    you overlooked an inportant part of SEC. 9006 which has already been posted in this thread

    HR 3590 EAS/PP
    “1 that is not an organization exempt from tax under section
    2 501(a).”

    That little phrase means if the corporation posseses a tax exemption certificate which 99% of all corporations do, that sending a 1099 is not required.

    But by all means send all the 1099′s you feel necessary to Walmart, Target, Apple, IBM, Exxon and the like I’m sure they will get a kick out of it.

    You guys are too funny, common sense doesn’t even register with you guys

  10. Harry Sit says

    Jim (#10) – You will have to check and see if Walmart, Target, Apple, IBM, Exxon and the like are exempt from tax under IRC section 501(a). I honestly don’t know where you got the idea that 99% of all corporations are exempt from taxes or what tax exemption certificate you are talking about.

  11. Lynnette says

    I don’t see how the IRS will match any of the 1099′s with reported income. 1099′s are issued on a ‘cash basis’ which means they are processed in year for the payments made during the year. However, most corporations file their taxes on an ‘accrual basis’. This mean that they report income when invoiced not when paid.

    Let’s see an example. A small corporation manufactures a special machine for use in the silicon wafer industry. They may only sell one or two a year, but each one sells for approx 1 million dollars. They sell one to Corp A in June 2012 and they sell one to Corp B in Dec 2012. Corp A pays in July and Corp B pays in Jan 2013. Corp A sends a 1099 for 1M for 2012. Small Busines is on accrual system and reports 2 M. Corp B sends 1099 for 1M for 2013. Small Business sells 0 machines in 2013 but has a 1M 1099 from Corp B.

    Current 1099 rules work, because typically only small business that provide services get 1099′s and this type of business usually file taxes on a cash basis.

    I hope I am missing some important detail on how the IRS will match the 1099s to income because as it stands now it appears that new 1009 requirements, are overly burdensome and simply do not address the problem

  12. Evan says

    I think Jim in #10 is letting his politics cloud his intellect. The exemptions in section 501 do not exempt “99% of corporations”. Section 501 exemptions are for things like churches, charities, pension plans, etc. So I guess you won’t have to send your church a 1099 for that $600 donation, but then again, there are record keeping requirements for that anyway.

    As for the exemption certificate he thinks “99% of corporations have”, the thing I think he might be referring to is a sales tax exemption certificate, which many corporations have for purchases of items which end up as part of their end product. Which is obviously not relevant here.

    Saying all that, I can’t believe this law won’t be modified or changed. This would be the most violated law in the US as millions of Americans are not going to track their purchases and send their grocery stores 1099′s each year. But then again, maybe that is the point.

  13. Harry Sit says

    Evan – I agree with you until the last paragraph. Just to be clear this law only affects businesses, not individual consumers, unless by “millions of Americans” you meant millions of American businesses. I will contend that the vast majority of businesses will comply because they don’t want to get into trouble; they want their businesses to grow.

  14. Malinda says

    Can someone help me, I am confused.

    What will this do to small business truck drivers?

    As it is when we go to deliver we get charged to have Lumpers unload our trailer (we are no longer allowed to do it ourselves even though the law says we have to be given the option, so not paying it is not a choice). Does this regulation require that we now send them a 1099 for that? (and yes, it is very easy to go over $600/year, just in two deliveries sometimes) AND if we do have to send them a 1099, how do we get their info so we can do so (some of the places are a little shady but like I said, we have no choice, I really dont want them having more info about us then they need)

    Also, what about when we purchase fuel? Are we going to have to send 1099s to every single truck stop we fuel at? With fuel prices what they are, one stop will take us over the $600 mark.

    AND, what about our mechanics? Get the oil changed twice and we are already over $600…

    Something tells me this is NOT going to be good. I wonder how many one truck operations such as ours will be forced under because they cant afford to pay an accountant to track this stuff and have no clue how to do it themselves (many guys dont look at their income/expenses until tax time, we are different because I refuse to not know what is going on in our business).

    Anyone have any idea how this will affect these things? I guess it is a good thing I still have 18 months to figure out a new book keeping program so that I can make sure we dont take one in the backside.

  15. Frank says

    malinda (and others):

    i think we can see the credit card companies creating a reporting service that will do 99% of the reporting for your business – it is just an extension of the yearly summary
    report that you get from them already…

  16. Hannah says

    A lot of us construction contractors go to places like Lowes, Home Depot, etc. on a daily basis and pay at the register each time. How are we going to get a W-9 from Lowes? We can’t withhold a percentage of payment if they don’t provide one because we have to pay to leave the store with our item. If places like Lowes refuse to give out 1099s and contractors can’t claim deductions for materials purchases as a result, there will be contractors going out of business all over the country. I think there will need to be a help line set up by the IRS or a website with data for commonly used vendors like these and the Costcos and Sams Clubs, Walmart, Target, Kmart, etc. And really the $600 limit was set ages ago – couldn’t they at least adjust the dollar amount for inflation before doing something so onerous for businesses? The only one I see gaining from this truly is the US Postal service with all the new forms being sent out first class. Could this be a back door USPS bailout?

  17. Harry Sit says

    Malinda, Hannah – I think businesses will have to put their name, address, and tax ID on every receipt. You collect the receipts and issue the 1099s in January for the previous year.

  18. Hannah says

    That would be great – if they do it of course. As a test run I emailed Lowes yesterday for a W-9. Haven’t heard back yet but I’m curious what they’ll respond if they do.

  19. Malinda says

    Thank you Frank for your insight however, we dont use credit in the course of our business (crazy I know).

    When we stop for fuel (as an example) we swipe out ‘fuel card’ and it sends billing straight to the payroll girl at the company we are leased onto. She then simply takes that amount out of our next settlement check. If we have to pay Lumpers, we need to pay them in cash or sometimes “t-check”. To do this we either pull cash out of our checking account, OR get cash advance numbers from that busy payroll girl again and it simply comes out of our settlement.

    Doing business this way has been cheaper for us since we dont need to carry a credit card and any advances from the company we are leased to have been interest free (crazy I know but what a great deal!), plus the ‘bills’ attached to each weeks income are mostly already removed from each weeks income (the fuel, lumpers or any shop visits we may have had).

    What really gets me with this rule is that we already cant claim anything we dont have receipts for… really, an audit without receipts would SUCK. So if we already have to hold onto receipts for 3-7 years in case of an audit, why make more work that is really pointless?

  20. greyseal says

    The W-9 form has no Office of Management and Budget (OMB) number. Noone in the private sector is required to comply with collection of information on any form that dosent have a valid OMB number. Google “Paper reduction Act”. Futhermore, the only regulations for the W-9 form is for rents, royalties and dividens.

  21. steve says

    Extending 1099 reporting to purchases from corporations, and especially the extension to purchases of goods (not just services), will be a double burden on small businesses. On the reporting side, it will be a direct added cost in time and money. The reporting impact on small businesses will be more of a burden than on large companies with dedicated accounting staff. On the income side, the new 1099 requirements will be a significant disincentive for companies to do business with small companies. To reduce the 1099 reporting burden, companies will be more likely to concentrate their purchases with a small set of large established vendors. For example, it will create an incentive for companies to select a single chain hotel, and use that for all travel lodging rather than use a variety of independent hotels. Business purchases will get funneled to large vendors such as Costco, Staples, Dell, etc., robbing business from small companies just to reduce what would become a bookkeeping burden. This is a very bad law for small business.

  22. ron says

    What about all of the purchases made on the web? Many times there isn’t any address, etc. Just a phone #. Think of the work they are placing on companies and the expense. Big brother is here!!!

  23. Jordan says

    The purpose of this law is to collect more tax revenues, duh. Everyone is wondering what they are thinking, and it’s the same thing they are always thinking, more money!

    For many small business owners, it will just be a pain but they will get through it. Others have subsisted meagerly for years by skimming a bit of money here and there that the IRS doesn’t get to touch. Some are more guilty than others, but in cash money businesses everyone knows it goes on.

    I am in the pizza business. We’ve been around for 23 years, and while we make an ok living I’m not planning on retiring anytime soon. This is going to put a damper on us, no lie. I have an account or two that are going to now issue me a 1099 at the end of the year, and I will be forced to pay the piper.

    It’s a significant amount of money that goes through the wormhole every year for the government, and this is their solution. I don’t like it, mostly cause it feels like using a shotgun to knock a bee out of the air. Overkill. But we’ll get by.

  24. James says

    I started calling Reps and Sens today about this but it just seems to me that the likely gains from tracking this information could hardly measure up to the cost of tracking these sales that appear in our bookkeeping anyway. Punish us all with an additional hurdle in order to catch the few people who are risking selling but not reporting? So sweeping a change is this that is must have been written by someone who has never run a business and has no concept of the difficulties involved. Asinine.

  25. Carol says

    I figure that those legitimate companies who already properly report their income will jump through the necessary hoops to comply with these new regulations, while those business that underreport their income will continue to find ways to do so. I do believe that underreporting of income is a problem, but I really don’t think these new reporting requirements will solve the issue. Maybe the IRS should be more vigilant about auditing the types of businesses susceptible to “cash money businesses” (like Pizza Parlors) instead of targeting 100% of all businesses with these new reporting requirements. (Sorry Jordan)

  26. Jake C says

    As the sole accountant for my company, I am tasked with gearing up for this change. The first problem I came across is this…How do I handle franchises that may or may not be owned locally? There are franchise structures in which some stores are corporation-owned and others are locally owned. Will I need a W-9 from each store? I’ve seen the question raised in a number of articles, but have not yet found an answer, or an IRS source that might help.

    Any ideas?

  27. JANE says

    In response to JIM, May 6, 2010: IRC 501(a) does not apply to 99% of the corporations in America.

    § 501 Exemption from tax on corporations, certain trusts, etc. Generally IRC 501 refers to Non Profits, etc.

  28. Carol B. says

    This is the most ridiculous law ever. The monumental cost of accounting and tracking this paperwork will far out weigh any monetary gains to the government and what relationship to health care does this even have except a possible non-existent revenue source. I as the owner of a small consulting business consisting of myself as the sole employee find this a huge pending paperwork nightmare. It makes being a small business owner think twice about staying in business. How can we get this repealed and fast? The IRS was bad before and this makes it unbelieveably our worst nightmare.

  29. Biz says

    Does this mean clients and customers can also send 1099s to pet-groomers too, when fluffy’s total annual grooms exceed $600?

    I groom many therapy dogs, ranchers herding/working dogs and puppy groomings for several breeders?
    So since they and other clients use their dogs for their businesses should I expect to get 1099s from them for the grooms?
    It appears from what I have read the new IRS 1099 rules will apply.

  30. Richard says

    The bottom line here is that our 60,000+ page tax code has created a “us against them” mentality. We all know our government is too big and we are over-taxed in a million ways. This is just another attempt to close one of those “evil” loop-holes created by an excessive tax code that even Charlie Wrangle, who is responsible for it gets caught “cheating” on his taxes every time he files his taxes. We need smaller government and a fair-tax that is about 6 pages (the size of the US Constitution). When “We, The People” have fair Government and fair Taxes, we will be more than willing to pay our fair share. Until then, we all find ways to not pay unfair taxes to an over-sized, money-hungry Government!

  31. Alliant Group says

    In 2012, the health care reform law will require ALL businesses, governments and charities to issue 1099 forms to vendors they pay over $600 for goods and services. This will undoubtedly financially crush thousands of small-and-medium-sized businesses who work for these companies. Read alliantgroups’ (www.alliantgroup.com) Dean Zerbe’s take on the 1099 burden and where its repeal currently stands in Congress and the administration. http://bit.ly/cG7USr

  32. Karla Taylor says

    I’m the treasurer for a small church. I am an unpaid volunteer, and by no means an expert in financial or tax matters. The church cannot afford to hire a professional. We do buy paper, cleaning supplies, photocopying services, etc. etc., and frequently reimburse individual members for such things as food for church events. We are terrified by the prospect of the new 1099 rules. I gather that we will have to do hundreds of 1099 forms for our purchases and reimbursements. I don’t see any way we can comply with our current resources.

    I see that non-profits are included in the reporting requirements. Churches often have special rules–will they be exempted from this one?

  33. Harry Sit says

    Karla – Breathe a sigh of relief. Churches are usually 501(c)(3) tax-exempt entities. They are excluded for this reporting requirement together with non-profits.

  34. Echo says

    I talked to my CPA about this today. And he said it will be a nightmare and hopes it gets repealed. I only 1099 about 2 people at this time cause most are incorperated. If it changes I’ll be 1099ing loads of people, which my CPA will be charging more money to do. Also on the side I am a small time landlord and I’m in Lowe’s and HD alot. So small business gets to spend more time and money to comply.

  35. DANVILLE DONUTS INC. says

    I’m tired of being a tax collector. When this Dec. 2011 provision goes into effect we will simply close our doors. Maybe we should all send our forms to the folks that voted for this bill.

  36. DANVILLE DONUTS INC. says

    The USA just doesn’t like business anymore. I quess they just want us to go away. Goodbye, Call me in Canada.

  37. bob says

    So now the govt is asking business to commit mail and wire fraud by submiting tax class 5 forms to tax class 2 (non0txable) entities. What a load of crap. I would send them a FOIA request…..

    Send me a copy of the treasury regulation that requires that I submit a tax class 5 form to a non taxable entity or individual.(tax class 2) Hint, hint ALL w-2 wage earners are tax class 2s……. As soon as I get that regulation then I;ll be more than happy to comply with your form.

    Fed crop Vs Merril

    “the govt must prove their authority” it is we the people that must make sure that the federal emplyees stay within the bounds of their authority”

    wake up people…..

  38. Nell says

    What ever happened to being innocent until proven guilty in this country? They are presuming that all businesses are cheating and making us go through a bookkeeping nightmare to prove that we are innocent.

  39. Mary says

    What is this going to mean to companies like ourselves that are a metal recycling business. All of our purchases are to individuals that walk in off the street and we pay all in cash. If we have to obtain a address and social security number from all of our vendors that sale to us we will have to close our doors. I know of not one that is going to want to receive a 1099 from us. What is this going to do to all of the recycling companies that do walk in business?

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