Balancing Act

Today I am going to introduce two concepts that every accountant and bookkeeper is familiar with. The first concept is PITA. For the uninitiated PITA is short for Pain In The Ass.

Now that we have PITA out of the way, we are going to apply this idea to the idea of reporting miscellaneous income via the ever popular form 1099.

...

Typically 1099 reporting is a tedious but fairly straightforward process. Every January there is a scramble to make sure that independent contractors and LLC’s receive a 1099 to report the income that was paid out in the prior year for outside services.

The process involves getting the Tax Identification Number of the outside contractor and completing a short form indicating what the business paid that contractor for the prior year. The IRS then compares the amount reported on the 1099 to the amount reported on the contractor’s return to see if they match. While it is a less than fun process, it is accepted as a normal part of the bargain.

Fast forward to January 2012 (when we file 1099’s for 2011) and we have a new challenge. Thanks to the Patient Protection and Affordable Care Act signed into law March 23, 2010, by President Obama, businesses will be required to report payment of over $600 per year of goods or services made to anyone, including corporations. Imagine a situation where you will have to create 1099’s for anyone who received a payment from your company. This could amount to 100’s if not 1000’s of 1099’s where in the past, there might have been only a few.

Now there is a possible escape valve for this. Starting next year credit card processors will be required to report total annual credit card transactions to the IRS via 1099-K. In theory, if a business were to pay for everything via credit or debit card, then the bank would be required to generate the 1099’s.

This may be a good reason to adopt a “Pay by Plastic Only” policy.

So while these reporting rules will be required for 2012, it really means that businesses need to take steps beginning in January 2011 to ensure that every vendor completes a W-9.

For obvious reasons you will also want to ensure that your books will be able to track payments by vendor as this will be critical in ensuring accurate reporting.

Vendors that refuse to complete a 1099 will be subject to 28% withholding. These funds that are withheld then need to be paid to the IRS. Additionally willful neglect will be rewarded with the IRS imposing a $50 fine for each occurrence on the offending company.

Businesses who choose not to issue out 1099’s will also find themselves fined $50 per violation for every W-9 that the company failed to send out to vendors. Additionally businesses who are deemed to exercise willful disregard get to pay the the vendors’ tax along with their own.

The long and the short of it is that businesses will essentially be deputized by the IRS and face stiff penalties if these duties are not handled correctly.

Best practice for businesses is to either get professional help or if you have the internal resources available, have every vendor complete a W-9 at the onset of the relationship. Record every payment in an accounting system that tracks payments by vendor.

See? The two concepts are tied together after all. The new 1099 reporting requirements are really a PITA.

Naturally we feel your pain and of course, if you have questions or would like assistance to ensure your company is in compliance, please give us a call at (203) 404-3984 or use the contact form and we will be happy to assist you.