1099 nightmare

Matthew Hoy
By Matthew Hoy on August 1, 2010

An oft-ignored bit of insanity in the health-care bill was the expansion in the use of IRS form 1099. For those of you who don’t know what it is, a 1099 has been used for as long as I can remember for businesses to report money paid to independent contractors. I got a 1099 from the San Diego Union-Tribune after they’d sacked me because they soon realized that they didn’t have the necessary expertise in-house (once I was out-of-house) to make the necessary preparations for their new pagination system.

The health-care bill Congress passed expanded the use of the 1099. Now instead of it only applying to outside labor purchased by your business, it would now also apply to products you purchase for your business. Why the change? Well, it was part of the farce that the final bill would cost less than $1 trillion and would reduce the deficit over time. The politicians in Washington thought that small businesses were tweaking the books just a bit and that this new reporting requirement would capture an additional $19 billion over 10 years.

What none of these politicians realized – probably because they’re completely unfamiliar with small businesses – is what a huge burden this creates. The law states that you must submit a 1099 to any business from which you purchase more than $600 in goods from in a year. That dollar amount is so low that it will bury small businesses in a tidal wave of paperwork. Remember, part of filing a 1099 is knowing the taxpayer ID of the person you’re issuing it to. Are you buying goods from some mom-and-pop shop that’s a sole-proprietorship? You’re going to have to get their taxpayer ID – for many of them that’s their Social Security Number. Think about the potential for identity theft there!

I was listening to the podcast of a symposium on the new law hosted by the American Enterprise Institute last week. There were a lot of really intriguing details about the new law, but one speaker, who is paid big money by big companies to advise them on this, presented a hypothetical which illustrates the insanity of this law.

Suppose you own a delivery business of some sort. Your drivers fill up on gas. Under this law, as a business owner you’ve got to keep track of every single gas station they fill up at. You must keep a running tally of how much you spend at each and every one, get their taxpayer ID number and issue them a 1099. But what if you spent only $300 at Gas Station A? You don’t have to issue them a 1099 do you? No, but you don’t know that the owner of Gas Station A also owns Gas Stations B, C and D. And you spent $100 at each of those 3 gas stations too. Now you’re at $600 and have to issue a 1099. But how are you supposed to know which and how many gas stations that guy owns?

Or how about if you buy your employees lunch once a week and you think you don’t need to issue the pizza place down the street a 1099 because you only spent $500 on pizzas over the course of the year? But you also spent $200 on sandwiches down at the sub shop and he owns that place too. Gotta issue a 1099. How are you supposed to know what shops that guy owns?

So, sanely, some in Congress want to repeal this bit of nuttery. And the Democrats aren’t going to let them do it unless they can “replace” (using the pay-go rules) the $19 billion this is projected to bring in.

Does anyone seriously wonder why the economy is crawling so slowly on bloodied knees and elbows out of this recession? Why would you want to invest and grow your business in this economy?

One comment on “1099 nightmare”

  1. There's another side of the problem. Suppose your business has a few hundred customers. You will be deluged with 1099's that need to be declared on your income tax return, making a burdensome task even more difficult.

    To say nothing about all the 1099's that the IRS will need to process and match up.

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