This is a guest column written by Deb Howard Greenleaf, a solopreneur who provides virtual accounting and bookkeeping services to small businesses and other solo professionals nationwide.
Visit www.greenleafaccounting.com/blog for more bookkeeping and tax tips from Deb, or follow her on Twitter: @dhgreenleaf.
Beginning in 2012, solopreneurs will be facing dramatic changes in 1099 reporting, but we’re not quite sure exactly what those changes will be!
Thanks to an easily missed provision of the new health care bill passed in January (H.R. 3590, section 9006), all businesses will be required to send 1099-MISC forms for all payments to vendors. This is a significant change from previous requirements:
• Corporations, including Sub-S corporations, were previously exempt from 1099 reporting for “nonemployee compensation,” the category typically reported with 1099-MISC forms. Now all business types—sole proprietorships, partnerships, LLCs and all types of corporations—will be eligible to receive 1099 forms.
• Vendors selling products will now be receiving 1099 forms, whereas previous reporting was limited to service providers.
Did You Buy a Computer? Send a 1099
First and foremost, you might be receiving 1099 forms for the first time if you operate your business as a Sub-S or “C” corporation. If you primarily sell products, you’ll also see a dramatic increase in the number of 1099s you receive. Technically, if you’re already reporting all of your income, then this will have no real impact on your business.
As a business that purchases products and services, however, you will be sending out a whole lot more 1099s. Did you buy a computer from Dell? Send them a 1099! Did you buy over $600 of postage stamps? Send the United States Postal Service a 1099! Crazy, huh?
The reality of these over-the-top requirements has led to numerous attempts to repeal or amend the new provision.
At this time, none of these attempts have succeeded, including a popular effort by Senator Mike Johanns of Nebraska to repeal the new requirements outright. Odds are good that there will be some changes before the new regulations are implemented, as there are currently four proposals to amend or repeal the requirements. Two House proposals and one Senate proposal call for elimination of the new requirements, but differ in how they would pay for lost revenue that was expected from the original requirements. Another proposal in the Senate, called the Information Reporting Modernization Act, would simply increase the reporting threshold from $600 to $5,000.
What Can Solopreneurs Do To Prepare For 1099 Changes?
What can you do to prepare for the new requirements, whatever they may be?
• Make sure that you’re using an accounting system that allows you to track your payments by vendor. Under both current and proposed regulations, you don’t need to send a 1099 to a vendor unless you’ve spent $600 or more with them in the calendar year. Most accounting systems will help you keep track of those totals.
• Next, you should send an IRS Form W-9 to each and every one of your service providers, including freelancers, consultants, your landlord, your cleaning person, your landscape service, your accountant, your lawyer and anyone else you may have paid for services. When sending out a 1099, you’ll need to report your vendor’s legal name, address and tax ID number. The W-9 form will help you acquire and document this information for each of your vendors.
• Lastly, mark your calendar. You are required to send out 1099 forms to your vendors no later than January 31 of each year. Copies of the 1099s, along with a Form 1096 summary, are due to the IRS by February 28 of each year.
Preparing now for the inevitable changes to 1099 reporting requirements will give you a head-start for the paperwork you’ll be facing in January 2013. In the process, you’ll have some peace of mind knowing that your systems are up-to-date for current requirements, and you will have one less thing to worry about!