Small business and startup issues: paperwork galore Mike | November 29th, 2010

Last year’s healthcare bill, love it or hate it, contained a provision that slipped in under the radar, but that will have a substantial impact on small businesses and startups. The bill contains two important changes to how 1099s have been used historically. First, 1099s will now have to be issued for goods as well as services, and second 1099s will now have to be issued to corporations as well as individuals. This means that small businesses will now be sending out literally millions of 1099 forms and will be responsible for keeping track of every one of these throughout the tax year. Beginning in 2012, businesses will be required to issue 1099 tax forms not just to freelancers and contract employees, but to ANY individual or corporation from which a business buys more than $600 in goods or services.

This means that in addition to the 1099s that you already prepare, you will also be preparing a flood of these for your office supply provider, office cleaner, caterer, accountant, computer hardware supplier, office furniture vendor, and on and on and on. The bill will drastically alter tax reporting by highlighting payments that have typically gone unreported – the idea is to increase government revenues by helping the IRS to account for millions of these payments.

Small businesses and lobbyists have started to push back hard against this change, realizing the profound impact it will have on their operations and accounting procedures. And the Congress is listening; two bills have been introduced which would repeal this provision and if passed, small business will be spared another regulatory hurtle which could threaten to drown us all under a new flood of paperwork.

And the revenue that will be “lost” to unreported payments? We will all have to live within the honor system as we know it and report those expenses as well as the income we derive from our businesses. Honesty is always less taxing than paperwork.

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  • Don

    Honesty may be less taxing than paperwork, but the beneficiaries of an honesty based system are not the honest, but rather it is the dishonest who win. The burden of a paperwork based system falls on the honest and dishonest as does the ultimate benefit of forcing the dishonest to pay taxes, lessening the burden on the honest.

  • http://www.emberstudio.com Mike McDonald

    I wouldn’t worry about it. This new 1099 provision is likely to be killed before it has a chance to impact any small business owners. Repeals are already in the works.

  • Mark

    U.S. Senate Unsuccessful in Repealing Small Business Tax Provision
    Well Mike, looks like it’s gonna happen (do you this repeal will come in the next session?)

    On Monday, the U.S. Senate tried unsuccessfully to repeal a disliked provision in the healthcare reform bill even though both Democrats and Republicans believe the element in question needs to be repealed to prevent businesses from being burdened with excessive paperwork. The Senate needs 67 votes to get rid of the tax filing provision and has failed to reach that threshold twice.

  • Aetaylor431

    Contrary to apparently what congress thinks of most small businesses, we are honest, we provide the majority of jobs in this country and are the primary reason this country has not drowned in red ink, whereas congress on the other hand is the most dishonest bunch of crooks the galaxy has ever spawned. I do mean spawned because they could not have been born. Example: this provision, like anything else that they pass that has no merit, they hide it inside of other legislation, hoping that people don’t notice until they get caught flatfooted not complying with new hidden rules. Anybody know if “rules” and pay increases for congress are ever in their own bill so we can see what they are doing for themselves?

  • christyj

    Exactly how does increasing the paperwork “lessen the burden” on those who are honest? You can’t force the dishonest to be honest. They will still be dishonest and find new ways to cheat the system, go underground, etc. History has shown that as tax rates increase, tax fraud increases, and tax revenue DECREASES. History has also shown that as tax rates decrease, tax fraud decreases, and tax revenue INCREASES. So it seems to me that if we let the honest be honest, the the fraudulent be fraudulent, and lower the tax rate and paperwork for everyone, then EVERYONE wins. I believe in Karma, and that those who are dishonest will pay one way or another.

  • christyj

    I think the reason Congress things people in business for themselves are dishonest and greedy is because of the old adage, “If you spot it, you got it.” Psychologists call it projection. They think they see in us what they refuse to see and acknowledge in themselves. They want to punish us for their sins.

  • Doctor Bigfarts

    lol this is the whiniest article in the world

    cry me a river

  • Scotty

    They fail to mention if you don’t have an EIN, you have to provide your SSN. No one in their right mind is going to give Home Depot for instance their SSN because they purchased $601 in lumber, etc. I can see it now, the minimum wage cashier demanding your SSN to complete the transaction…..the identity thieves will have a field day. I would never give out my SSN on ordinary transactions that happen to be over $600….let them arrest me or whatever they plan on doing to enforce it.

  • http://twitter.com/mike_samson mike samson

    @Don, @christyj: Thanks for the comments! I agree with Don that the burden will always be on those who honestly and transparently report, whether additional paperwork is involved or not. The burden Don refers to is not in the extra work involved, but rather in the actual economic cost. The motivation behind this regulation is pure: spread the tax burden equally amongst everyone. It is the execution that is poor: require all businesses to generate massive amounts of paperwork to ensure that this happens. Ironically, the costs that this will incur are huge and have the net effect of punishing everyone – honest and dishonest alike. It is the honest, who don’t deserve such punishment.

  • http://twitter.com/mike_samson mike samson

    @Don, @christyj: Thanks for the comments! I agree with Don that the burden will always be on those who honestly and transparently report, whether additional paperwork is involved or not. The burden Don refers to is not in the extra work involved, but rather in the actual economic cost. The motivation behind this regulation is pure: spread the tax burden equally amongst everyone. It is the execution that is poor: require all businesses to generate massive amounts of paperwork to ensure that this happens. Ironically, the costs that this will incur are huge and have the net effect of punishing everyone – honest and dishonest alike. It is the honest, who don’t deserve such punishment.

  • http://twitter.com/mike_samson mike samson

    @Mike: Well given the track record of this congress and their inability to get much done, I wouldn’t give great odds to a repeal anytime soon. Turns out that just two days ago the bills pending were both blocked because of lack of cooperation.

  • http://twitter.com/mike_samson mike samson

    @Mark: Thanks for the comment. I wonder if they will have the will to protect small business by doing what’s right?

  • http://twitter.com/mike_samson mike samson

    @Aetaylor431: At the root of this provision is an honest attempt to collect the taxes that businesses, small and large, owe. In and of itself, that is not a bad thing – we all have to shoulder our responsibilities. Having said that, I am in constant amazement at how these rules are not thought through and the impact is left without proper analysis.

  • http://twitter.com/mike_samson mike samson

    @Doctor Bigfarts: Thanks for reading and expressing your opinion! I hope that your proctology business is prepared to hire an extra employee to handle the new paperwork burden which will come when you have to issue 1099s to every supplier of latex gloves, office supplies, and nurses scrubs, as well as every contractor you use. Whine? Grouse perhaps, even grumble. But whine? I think not. :)

  • http://twitter.com/mike_samson mike samson

    @Scotty: Wow – that is a great point and one that hasn’t been discussed in the media. The burden in this case will not be on you to provide your SSN (remember, they’re not requiring Best Buy customers to report) but rather on the merchant to gather this information and report on it themselves. Hm. Good food for thought.

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