President Obama has signed a law that repeals two sets of rules that had business owners, company managers and landlords up in arms because of the paperwork nightmare they created. The rules that involved businesses issuing a blizzard of 1099 forms were created by two laws enacted in 2010. Rental property owners had to begin complying with one of the sets of rules this year. The second set for other types of businesses was not scheduled to go into effect until next year.
The new rules ignited an immediate firestorm of criticism, but repealing them took longer than some expected.
Thankfully, all the attempted 1099 rule changes have finally been quashed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, which was signed into law on April 14, 2011.
Just so you understand where we stand now, here’s the 1099 story from beginning to end. We will start with the longstanding 1099 rules, which will now continue to apply without any changes.
Longstanding 1099 Rules Remain in Force
For many years, businesses have been required to report various types of payments to the IRS and to recipient taxpayers.
For instance, when a business pays $600 or more during a calendar year to an unincorporated independent contractor for services rendered, the business must file a Form 1099-MISC with the IRS to report the total amount paid in that year. The business must also send a copy of the Form 1099-MISC to the payee (a so-called payee statement). This reporting procedure helps the contractor remember to include the payments as income on his or her tax return, and it helps the IRS to make sure that happens.
Under the longstanding rules, other types of payments that businesses must report to the IRS on 1099s and to payees on payee statements include:
Commissions, fees, and other forms of compensation paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
Interest, rents, royalties, annuities, and other income items paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
When a 1099 is required, it must show the total amount of payments in the calendar year, the name and address of the payee, the tax ID number (TIN) of the payee, contact information for the payer, and the payer’s TIN. (For privacy reasons, it’s OK to show a truncated TIN on a 1099 that reports payments to an individual recipient.)
If your business doesn’t have a recipient’s TIN, you may be required to institute backup federal income tax withholding at a 28 percent rate on payments to that payee.
In most cases, the rules summarized above apply equally to payments made by non-profit organizations, because they are generally considered to be businesses for 1099 reporting purposes.
For 2011, if a payer fails to file a proper 1099 with the government, the IRS can assess a penalty of $100 or more per failure. For 2011, if a payer fails to send a proper payee statement, the IRS can assess an additional penalty of $100 or more for each failure. (Internal Revenue Code Sections 6721, 6722, and 6723)
Important: Penalties for failing to file 1099s and issue payee statements were increased by a 2010 law. The increased penalties remain in effect. To sum up, each time you fail to file a 1099 and issue the related payee statement, the IRS can still assess a penalty of $200 or more.
Most Payments to Corporations Need Not Be Reported
Most payments to corporations are exempt from any 1099 reporting requirements. There are a few exceptions. For instance, payments of $600 or more in a calendar year to a corporate law firm must be reported on a Form 1099-MISC for that year.
|Example 1: Your business makes monthly payments to rent office space from a corporate lessor. Under longstanding rules that will now remain in force, there is no 1099 reporting requirement for the payments, because they are made to a corporation.|
Payments for Property Need Not Be Reported
There is generally no requirement to issue 1099s to report payments for property (merchandise, raw materials, equipment, and just about anything else you can put your hands on).
|Example 2: Your business buys a delivery van, display shelving, and computer equipment. Under the longstanding rules that will now remain in force, there is no 1099 reporting requirement for these payments, because they are for property.|
2010 Legislation Tried to Change the Rules
Last year’s healthcare legislation and a separate small business law attempted to make big changes to the 1099 reporting rules. The repealed changes are briefly summarized below.
Payments to Corporations: Starting in 2012, if your business paid a corporation $600 or more in a calendar year, you generally would have been required to file a 1099 and issue a statement to the payee.
Also, your business would have been required to obtain a taxpayer ID number from each corporate payee to avoid the requirement for backup federal income tax withholding.
On the other side of the coin, if your business is incorporated, it would have had to supply customers with your company’s TIN to avoid backup withholding on payments to your business.
Payments for Property: Starting in 2012, if your business paid $600 or more in a calendar year to any payee as “amounts in consideration for property,” you would have been required to file a 1099 and issue a payee statement. Once again, the term “property” means equipment, merchandise, raw materials, and many other items.
Also, your business would have been required to obtain a TIN from each affected payee to avoid the requirement for backup withholding of federal income tax.
On the other side of the coin, if your business sells property, you would have had to supply customers with your TIN to avoid backup withholding on payments to your business.
Payments of Gross Proceeds: Starting in 2012, a third new rule would have required filing a 1099 and payee statement if your business paid $600 or more in “gross proceeds” to any payee in a calendar year. Apparently, this provision was intended to force the filing of millions of 1099s and payee statements to report business expenditures for things like meals at unincorporated restaurants, repairs of business vehicles at unincorporated auto shops, and seminars presented by unincorporated providers (the list could go on and on).
Payments by Rental Property Owners: Starting this year, owning rental property would have generally been considered a “business” for purposes of the 1099 reporting rules. Therefore, property owners would have generally been required to file 1099s and issue payee statements for any unincorporated service providers that were paid $600 or more during 2011 (for jobs including yard care, maintenance, and accounting). Starting in 2012, rental property owners would have been required to comply with the other burdensome 1099 changes explained earlier.
All of these now-repealed mandates would have undoubtedly required many millions of additional 1099s and payee statements each year.
Where We Stand Now
Thanks to the just-passed Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, none of the attempted 1099 changes will take effect. So if your business is currently handling 1099s and payee statements without any problems, you can continue with the status quo. On the other hand, if you know you have compliance deficiencies, the harsher penalties that are now in effect dictate in favor of cleaning up your act (the harsher penalties will remain in force).
Finally, you might wonder how Congress compensated for the estimated $22 billion of revenue that was allegedly lost by repealing the attempted 1099 changes. The Feds will try to recoup the revenue by collecting more “excess advance payments” of health insurance premium assistance credits collected by individuals. This change will take effect in 2014.
Consult with your tax adviser with any questions you may have about issuing 1099 forms in your situation.