7/13/2010 Update: The 1099 reporting of payment of over $600/year to corporations will only apply to cash, check or barter according to the IRS. It may be time to institute a policy of paying corporations via credit or debit card. This comes about because starting next year credit card processors will be required to report total annual credit card transactions to the IRS via 1099-K; the IRS will be able to compare a corporations gross receipts with the report from the credit card processor.
As part of the Patient Protection and Affordable Care Act signed into law March 23, 2010, by President Obama, businesses will be required to report payment of over $600 per year of goods or services made to anyone, including corporations, except for entities exempt under 501 (a), which are charities and the like. Section 9006 of the Act amended Section 6041 of the Internal Revenue service code-go ahead, look it up. This change in information reporting has been discussed for a long time as a means of tracking down more tax cheats, but until now congress had not acted upon it.
The requirement for information reporting starts in 2012. This start date suggests that means your business will need to be gathering reporting information in 2011, so it can be reported on 2012 1099s.
The law represents a considerable expansion of information reporting via 1099-MISC; in the past corporations were generally excluded from information reporting; only payment for services (and goods paid for incident to the service) over $600 per year, and goods over of $5000 per year need to be reported.
The IRS uses 1099 information for income matching ,which helps them identify businesses that are under reporting of income and not paying all of their taxes. Yes, even your business is compelled to be an agent of the IRS under certain circumstances.
So what do you need to do now? Start getting w-9s from everybody including corporations: you must have a current address and valid Tax Payer Identification Numbers (EIN or SSN) for any vendor you routinely pay more than $600 per year for goods or services-starting in 2011. A Form w-9 is the recommended method for obtaining this information; it is available in PDF format from the IRS.gov website (pdfs can be printed out using adobe acrobat reader which can be downloaded for free from the adobe.com website). Art and Business Consulting LLC and its owners and employees are not affiliated with IRS or Adobe.
Be sure your accounting program lists purchases by vendor and amount paid as you will also need this information to properly prepare the 1099s in 2012. Look at the length of your vendor list, and you will see this project is not one to be undertaken at the last minute. If you are like most businesses you probably have only been reporting a very small portion of that list. It’s going to take a while as some vendors will be reluctant to supply the information when asked. In 2011 you will have no choice, you will be required to gather this information.
What do I do if a business does not voluntarily supply the W-9 information when asked? Your business is supposed to do backup withholding of 28%, meaning you are supposed to keep 28% of what you otherwise would have given to them in payment and give it to the government instead. The threat of back-up withholding is usually enough to ensure cooperation on the part of the entity completing the W-9. There is a $50 per vendor per year fine for failure to 1099. The fine may be waived if it is not shown to be from willful neglect. Since the new information reporting requirement will be for the tax year 2011 do not do backup withholding on noncompliant corporations until then.
What if I don’t’ want issue the 1099s? In addition to the $50 fine per occurrence for failure to obtain a W-9 (see Form W-9 page 2), the government comes back to you for all the other business’s taxes; this is called Willful Disregard by the IRS and they take a dim view of it. So you get to pay the other guys taxes and yours. Very generous. So either issue the 1099′s and deduct what you paid them, or don’t deduct what you paid and don’t issue the 1099′s. Matters not to your bookkeeper or accountant, you pick. How many people’s taxes are you willing to pay?
As always Art and Business Consulting is here to help. If you need help with this issue another small business and or tax issue, please give us a call.
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