Am I My Brother’s Tax Keeper?

The government thinks so. It has increased the ante on my obligation to issue 1099s for reporting income that I pay to independent contractors in the course of my business. If I fail to do so, I’m penalized—a whopping $100 per violation ($250 per violation for an intentional failure) for the IRS and another for each payee. Thus, if I fail to issue required 1099s to five independent contractors, it will cost me $1,000! What’s more, I now have to rat on myself if I fail to issue required 1099s:

  • Form 1120 (for C corporations), Question 15a in the “Other Information” section asks: Did the corporation make any payments in 2011 that would require it to file Form(s) 1099? Question 15b asks: If “Yes,” did or will the corporation file all required Forms 1099?
  • Form 1120S (for S corporations), Question 10a in the “Other Information” section asks: Did the corporation make any payments in 2011 that would require it to file Form(s) 1099? Question 10b asks: If “Yes,” did or will the corporation file all required Forms 1099?
  • Form 1065 (for partnerships and limited liability companies), Question 18a asks: Did you make any payments in 2011 that would require you to file Form(s) 1099? Question 18b asks: If “Yes,” did you or will you file all required Form(s) 1099?
  • Schedule C of Form 1040 (for sole proprietors), Line I asks: Did you make any payments in 2011 that would require you to file Form(s) 1099? Line J asks: If “Yes,” did you or will you file all required Form(s) 1099?

The government’s tax gap, which is now an estimated $350 billion, can be closed to some extent by information reporting. The U.S. Government Accountability Office (GAO) found:  “Information reporting is a powerful tool for encouraging voluntary compliance by payees and helping the IRS detect underreported income.” That’s all well and good for the government, but as a business owner, my 1099 obligation entails considerable work (which is nonbillable time to me):

  • I have to ascertain whether a worker is one for whom I have to issue a 1099-MISC. This is done by asking the worker to supply his or her tax identification number on Form W-9 and retain the form with my records. If the worker’s business is incorporated, no further action is required on my part.
  • If I determine that the worker is someone for whom a 1099-MISC is required, then I have to keep track of payments. Those totaling $600 or more for the year must be reported; there’s no mandatory reporting for payments under this amount (although the government wouldn’t mind if I reported lesser amounts).
  • I have to determine whether the payment is covered by Form 1099-K, which relieves me of filing Form 1099MISC. The 1099-K applies if the contractor is paid by a credit or debit card or electronic payment (e.g., PayPal) and is not exempt; in this case, payments will be reported by credit card processors and other third-party providers. How do I know whether the contractor is exempt from 1099-K reporting (his or her transactions for the year were fewer than 200 and totaled less than $20,000)? Good question? I don’t have a good answer! (Of course, the IRS won’t mind if I issue the form to protect myself even though it’s not required; there’s no penalty for excess filing.)
  • I have to file the 1099-MISCs with the IRS and provide a copy of the forms to my independent contractors.

To meet my 1099 obligation, I either have to devote my time or pay someone to do it for me. This regulatory burden is an added cost of business. While I get it, I wish I didn’t have to do it!

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