April 16, 2013
Businesses and not-for-profit organizations are accustomed to IRS rules that require them to report certain payments on annual Form 1099 information returns. However, the recently enacted healthcare law imposes surprising new Form 1099 reporting requirements. Complying with them may add significantly to your organization's paperwork burden. While the new rules don't apply to payments made before 2012, it's not too early to start gearing up to deal with them.
Key Point: For many organizations, the new rules will require issuing 1099s for all sorts of business payments that they never had to worry about before. And the IRS will receive 1099s detailing how they spend money on a whole new range of business expenses. However, the healthcare legislation doesnotrequire Form 1099 reporting of payments that are made for non-business reasons.
Current Rules in a Nutshell
Background:For many years, businesses have been required to report various payments on different versions of Form 1099. For instance, when a business pays $600 or more during a calendar year to an independent contractor for services, the business must issue the contractor a Form 1099-MISC that reports the amount paid that year. The business must also furnish a copy of the Form 1099-MISC to the IRS. This reporting procedure helps contractors remember to include the payments on their tax returns, and it helps the IRS ensure that income is reported.
Under rules now in effect, other types of payments that businesses must report on Forms 1099 include:
- Commissions, fees, and other compensation paid to a single recipient when the total amount paid in a calendar year is $600 or more.
- Interest, rents, royalties, annuities, and income items paid to a single recipient when the total amount paid in a calendar year is $600 or more.
When a Form 1099 is required, it must show:
- The total amount for the calendar year;
- The name and address of the payee;
- The tax ID number (TIN) of the payee (For privacy reasons, it's okay to show a truncated TIN on a 1099 issued to an individual);
- Contact information for the payer; and
- The payer's TIN.
If your business doesn't have a payee's TIN, you may be required to institute backup federal income tax withholding at a 28 percent rate on payments under Internal Revenue Code Section 3406.
In most cases, the rules summarized above apply to payments made by not-for-profit organizations since they are generally considered to be businesses for Form 1099 reporting purposes.
If a payer inadvertently fails to issue a proper Form 1099, the IRS can assess a $50 penalty. The penalty for eachintentionalfailure can be $100 or more.
Reporting Payments to Corporations
Under the rules that currently apply, most payments to corporations are exempt from Form 1099 reporting requirements. However, there are a few exceptions. For instance, payments of $600 or more in a calendar year to an incorporated law firm must be reported on Form 1099-MISC.
Example: Your business makes $30,000 in monthly payments to rent office space from a corporate lessor. Under the current rules that apply today, there is no 1099 reporting requirement for the payments, because they are made to a corporation.
Reporting Payments for Property
Under current rules, there is also generally no requirement to issue 1099s to report payments for property (such as merchandise, raw materials and equipment).
Example: Your business buys a delivery van, display shelving, and computer equipment. Under today's rules, there's no 1099 reporting requirement for these purchases.
What Will Change in 2012 and Beyond?
The healthcare legislation makes two big changes to the existing Form 1099 reporting rules and a third change that is hard to assess without further guidance from the IRS.
First Change: Payments to Corporations Must Be Reported. Starting in 2012, if your business pays a corporation $600 or more in a calendar year, you must report the total amount on an information return. Presumably, Form 1099-MISC will be used for this purpose, or the IRS will develop a new form. (Payments to corporations that are tax-exempt organizations will be exempt from this new requirement.)
- In 2012, your business pays $30,000 to rent office space from a corporate lessor. Under the new rules that take effect in 2012, the $30,000 must be reported on a Form 1099.
- Your business pays $2,000 for four employees to attend a seminar in 2012 put on by a corporation. Under the new rules that go into effect that year, the $2,000 must be reported on a Form 1099.
- Several employees go on a business trip in 2012, and your business pays $1,500 to a corporate hotel. The $1,500 must be reported on a Form 1099 for that year.
- In 2012, your business spends $1,000 at a local restaurant for an employee holiday dinner. The restaurant is operated by a corporation. Under the rules scheduled to become effective that year, the $1,000 must be reported on a Form 1099.
Second Change: Payments for Property Must Be Reported.Starting in 2012, if your business pays $600 or more in a calendar year to any party (including an individual) as "amounts in consideration for property," you must report the total payments on an information return for that year. The term "property" means computer equipment, office supplies, raw materials, and just about anything else you can put your hands on. Again, Form 1099-MISC might be used to reported affected payments, or a new IRS form might be created.
- In 2012, your business buys cash registers from a supplier for $25,000. It also spends $1,000 at a food and beverage store to buy refreshments for a company party. Later that year, the company pays an individual $1,500 for an old pickup truck and spends $750 at an office supply store for copier ink and computer paper. Under the new rules that are scheduled to go into effect in 2012, all these transactions will require your business to issue 1099s.
As you can see, the new requirements to report corporate payments and amounts to buy property will undoubtedly result in the issuance of many millions of additional Forms 1099 each year. (Presumably, payments between related corporations will not be exempt.)
Another burden: Your business must also obtain a TIN from each affected payee to avoid the requirement for backup withholding of federal income tax.
On the other side of the coin, if your business sells property or you operate a corporate business, you will have to supply customers with your TIN to avoid backup withholding on payments made to you.
Third Change: Payments of "Gross Proceeds" Must Be Reported. Here's where the new upcoming rules get more confusing. Under a third new rule that will take effect in 2012, payments of $600 or more in "gross proceeds" to a payee in a calendar year must be reported on an information return. At this point, it is unclear what this new reporting requirement is meant to cover. The best guess is that it is meant to cover payments to non-corporate payees, such as restaurants and other small businesses. We are awaiting IRS clarification on this issue.
Dealing with the new Form 1099 reporting rules is going to be difficult for many organizations -- resulting in an avalanche of paperwork. Your business will likely have to modify its accounting procedures to capture payee information that will be needed to comply with the new requirements.
Remember: TINs must be obtained from your vendors to avoid having to institute backup federal income tax withholding on payments made to them. By the same token, your business must ensure that your customers have your TIN to avoid backup withholding on payments made to you.
What if backup withholding does occur on payments made to you? You must be prepared to track the withheld amounts so you can claim credit for them at tax return time. If your business winds up on either side of the backup withholding rules, it can be a real mess. And with lots more 1099s flying around, the odds of errors rise proportionately.
To compound the problems with the new reporting requirements, many businesses use accounting methods other than the cash basis. In addition, a number of businesses file their returns using reporting periods other than calendar years. In an audit, imagine your business and the IRS attempting to reconcile 1099s with these complications.
Fortunately, the new Form 1099 reporting rules (including any backup withholding implications) don't cover payments made before 2012. So there's still plenty of time to plan for what is likely to be a daunting task. Don't waste it!