Small Business

Health-Care Bill Surprise: 1099 Nightmare


A clause buried in the bill requires more tax forms—and small business will bear the brunt

Anyone who makes it to page 737 of the massive health-care bill approved by Congress in March will find a three-paragraph section that has nothing to do with hospitals, doctors, or drugs. The provision, inserted by Democrats on the Senate Finance Committee to help offset the cost of the bill, requires companies to report to the IRS payments of more than $600 a year to any vendor. The intent is noble: to capture $2 billion or more a year in taxes on income that currently goes unreported by contractors and small businesses.

Business advocates fear it could generate a flood of paperwork. While the provision affects all companies, small businesses will be slammed the hardest because they often lack the compliance departments and legions of accountants that corporations retain on staff.

Today, businesses must file 1099-MISC forms only for freelancers and other service providers that aren't incorporated. The form is meant to make sure these workers pay taxes that the business would withhold if they were regular employees. The new rule, set to take effect in 2012, will expand such reporting to include payments to companies, and for goods as well as services. That means businesses will need to get tax ID numbers and file forms for almost all suppliers—and track all their small expenses to see which vendors meet the threshold. Spend $600 on cell-phone service, at FedEx, or fueling up at the local gas station? Better get their tax ID number. Buy new computers? File a 1099. "It's going to be a compliance nightmare," says Rob Seltzer, an accountant in Beverly Hills, Calif. He figures he would go from filing two 1099s to 15.

Seltzer is on the low end. The IRS says about 85 million 1099-MISC forms are filed each year, and that could jump significantly under the new law. The National Small Business Assn. estimates that the average company will have to file 95 of the forms under the measure, up from fewer than 20 today.

Representative Dan Lungren (R-Calif.), with the support of small business advocates, has introduced a bill to roll back the provision. He says it imposes extra costs on business owners who pay their taxes to help the government catch those who don't. "This paperwork burden is only justifiable if you assume that nearly all businesses are cheaters," says Lungren. The bill would force "every single businessperson to become an IRS agent."

The bottom line: A provision of the new health-care bill requires companies to file tax forms for almost every supplier—a big burden on small businesses.

Tozzi covers small business for Businessweek.com.

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