The recent healthcare act includes a passage that will significantly increase the number of Forms 1099-MISC businesses must file, thereby significantly increasing the amount of data collection and paperwork required for those businesses.
Section 9006 of the Patient Protection and Affordable Care Act modifies Section 6041 of the tax code to require persons engaged in a trade or business to report annual payments of $600 or more made to any payee, including corporations, except tax-exempt entities. Such payments include consideration paid for merchandise, equipment, inventory, and other goods or services. In other words: most business-to-business transactions.
Previously, payments to corporations were not required to be reported, nor were payments for goods or payments for income that was not fixed or determinable. In general, 1099s were used to document rent payments and payments to freelance or contract workers.
The modified reporting requirements go into effect January 1, 2012. Between now and then, the IRS is expected to issue regulations and hold public hearings on the subject. The new legislation is another attempt by lawmakers to reduce the federal tax gap.
Barring any significant changes, the revised tax code will impact businesses on multiple levels:
- Businesses must know each vendor’s address and U.S. Taxpayer Identification Number (TIN), which likely will require a time-consuming project to update and maintain vendor databases. Businesses also will have to file more 1099s, which will increase paperwork and printing and filing costs each year.
- For every Form 1099 that is filed, one copy is maintained by the payer, a second copy is sent to the payee and a third copy sent to the IRS. It will be increasingly important to maintain accurate records now that most of a business’s income and expenses will be reported to the IRS on 1099s — expenses reported on the forms the business files itself and income reported by the payees from whom the business received consideration.
- If a vendor’s TIN is unknown, businesses must withhold taxes at the current rate of 28 percent. A payer that does not have the payee’s TIN and fails to withhold the proper amount will be held liable for the tax that should have been withheld.
- If a payer files a 1099 with an incorrect TIN or name for one of its payees, it will lead to even more paperwork and potentially stiffer penalties.
For more information on the new legislation and the changes it will necessitate, contact a Barnes Dennig representative.