The new rule, which was tucked in, of all things, the Obamacare bill, is truly staggering in its dimensions, in the record keeping that will be required for even the tiniest of businesses and the tracking capabilities of the information that will be provided to the government by complying with this regulation.
Here's more from Reuters on the horrors of the regulation:
The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as for services. That sounds like a technicality, but it’s got small business up in arms.
Here’s why it matters, and what you need to know.
The new rule requires all business to file 1099 forms for goods as well as services, if those goods cost over $600 annually (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did. The rule is slated to go into effect in 2012.
It means that you’d better be ready to track your spending by vendor, and have an easy way of tallying up whether that spending totals more than $600 per year. A business that spends $20 a week on pizza for its employees, for example, would spend a total of $1,040 a yea r— and would need to file a 1099 form to that local pizzeria.
Who will it affect?
It will affect all businesses, including sole proprietors, consultants, self-employed people and freelancers, who are considered businesses for tax purposes, but may not think of themselves that way. It also will apply to charities and other tax-exempt organizations. The National Taxpayer Advocate, based on Internal Revenue Service data, figures that it will affect 26 million sole proprietorships, 4 million S corporations, 2 million C corporations, 3 million partnerships, 2 million farms, 1 million charities and other tax-exempt organizations, and likely more than 100,000 federal, state and local government entities. All told, that’s more than 38 million taxpayers and taxpaying entities...As with most things tax, the complications are in the details, and the recordkeeping complexities. For example, how will you track that $600, if you spend it at multiple locations of the same business? What if some payments are made by check and others by credit card to the same vendor? What about returns? Will a business be required to send 1099 forms to its electricity provider or to its landlord? Get into the thorny details, and the questions — largely unanswered — seem endless. For sole proprietors, who use Social Security numbers for tax purposes, the new rule also raises the potential for identity theft, especially if that number becomes public through printing on receipts, according to the National Taxpayer Advocate. As Steve Henley, a national practice leader at financial consultancy CBIZ MHM, says: “It is a tremendous new administrative burden, and it is so senseless.”
Are there penalties for messing up?
Yes. A business can be fined $50 for every 1099 it fails to report, and that amount can rise to $100 if the failure to file was considered “intentional.” Also, businesses would be required to withhold taxes at a rate of 28% from vendors who fail to supply their taxpayer identification numbers...
If you’re running a start-up or one-person operation that doesn’t already have a separate business credit card, get one. To comply with the rule, you’ll need to be sure that you have the legal name, address and taxpayer identification of each of your vendors on file. If you don’t, you’ll want to take some time in 2011 to send Form W-9s out to all of them in order to gather this information.