2010 Lane Reports

Health Care Law Reform Brings Attention to Form 1099-MISC

The Lane Report, December 2010
Wednesday, December 1, 2010 6:00 am
by Joshua S. Kreitzer

Every January, many Americans find a series of statements in their mailbox from banks and brokerages labeled "Form 1099." These statements are known to the Internal Revenue Service as "information returns." Besides the Form 1099-DIV (for dividends) and Form 1099-INT (for interest) which are widely familiar, the IRS also publishes a variety of other forms in the 1099 series for reporting other types of payments. This article describes one of these forms which is of particular relevance to business owners: Form 1099-MISC (Miscellaneous Income).

Form 1099-MISC is required to be filed by certain persons who make payments (payers) to other persons (recipients). It applies only to payments made in the course of a trade or business, including the operation of a nonprofit organization, but not to payments for personal reasons. As with other Forms 1099, the payer must provide a copy of the form to the recipient (usually by January 31) and file the form with the IRS (usually by February 28, or by March 31 if filing electronically).

Payments for which a 1099-MISC must be filed include, generally, payments of $600 or more in the taxable year to a recipient for rents, compensation, services, prizes, and awards. Payments to employees for wages and salaries are not reported on Form 1099-MISC; they are reported on Form W-2 instead. There are two other significant types of exclusions:

  1.  Amounts in consideration for property -- such as payments to purchase merchandise; and
  2. Amounts paid to most corporations. (Note that payments to law firms are not excluded even if the law firm is incorporated — the payer must issue a 1099-MISC to the law firm.)

This means that payments made to sole proprietors, partnerships, LLCs, etc. for services rendered in the course of business typically must be reported on Form 1099-MISC.

The aforementioned exclusions, though, are currently scheduled for elimination for payments made in 2012. A provision of the Patient Protection and Affordable Care Act of 2010 (the health care law sometimes known as Obamacare) added “amounts in consideration for property” to the kinds of payments which must be reported, effective for tax year 2012. Along the same lines, the current regulation which provides that information returns are not needed when the recipient is a corporation is to be abolished, and for tax year 2012 Forms 1099-MISC will be required for payments to corporations as well (unless the recipient is a tax-exempt corporation). The purpose of these provisions is to raise approximately $17 billion over a 10-year period by seeking to deter businesses from underreporting their income.

The new 1099 requirements were little noticed before the health care bill was passed. However, once the bill became law, commentators raised concerns about the burden the additional reporting requirements would place on small business. A Wall Street Journal editorial stated, “Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations' corporate parents.” Curtis Dubay, a senior policy analyst at the Heritage Foundation, has written, “Businesses will now have to issue more paperwork every time they pay rent for their offices, buy new equipment to make their workers more efficient or increase capacity, or simply purchase basic office supplies like coffee and paper towels for their break rooms. … Large businesses can more easily absorb the cost of this new bureaucracy with their large legal and accounting teams than small businesses that do not have such manpower. The new requirements will slam small businesses hard, because the paperwork burden will force them to redirect scarce resources from productive activities that could grow the business, add jobs, and pay higher wages to complying with the onerous new reporting requirements.”

Even President Obama himself has joined the critics of the new 1099 requirements. In his news conference on November 3, he stated, “The 1099 provision in the health care bill appears to be too burdensome for small businesses.  It just involves too much paperwork, too much filing.  It's probably counterproductive. It was designed to make sure that revenue was raised to help pay for some of the other provisions, but if it ends up just being so much trouble that small businesses find it difficult to manage, that's something that we should take a look at.”

On November 29, two different amendments were voted on by the Senate which would each have repealed the new 1099 requirements. However, the amendments differed as to whether and how the expected revenue from the reporting requirements would be replaced, and neither amendment was able to garner the two-thirds majority that was required. Thus, as of this writing, the additional 1099 requirements remain law.

In the meantime, while businesses wait for Congress to eliminate the additional reporting requirements scheduled to take effect in 2012, they should make sure they are prepared to issue the Forms 1099-MISC that are now required and are expected to remain required. To do this, businesses should make sure their records indicate to whom they made payments for services in 2010 and for what. Just as important, payers need to know whether the recipients of the payments are corporations as opposed to sole proprietors, LLCs, partnerships, etc., as Forms 1099-MISC will be required for the latter. The payer should also make sure to collect the full addresses and taxpayer identification numbers (TINs) of all recipients who will be sent Forms 1099-MISC. If any recipients' TINs are missing, the payer should send the recipient Form W-9 (Request for Taxpayer Identification Number and Certification). And, just as important, payers should order a sufficient supply of Forms 1099-MISC — the form is printed on carbon paper and, unlike many IRS forms, cannot just be downloaded from the Internet. Make sure to get Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) as well — the payer will need this form, which reports the sum of all payments made and taxes withheld as reported on the Forms 1099-MISC, when filing Forms 1099-MISC with the IRS.

 It should be noted that this article does not describe all of the requirements that apply to Form 1099-MISC. Other requirements apply when a payer makes payments for items as disparate as literary royalties and payments to crew members on small fishing boats for their share of the catch. For further information about Forms 1099 and other tax forms, we'll be happy to advise you. Please contact Marc Lane in confidence via email at mlane@marcjlane.com or via telephone at (312) 372-1040.

Joshua S. Kreitzer is a Senior Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. Mr. Kreitzer is a graduate of Northwestern University (J.D.), the University of South Florida (M.A.), and Harvard University (B.A.)

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