Small business owners need to read this recent article from The Washington Post. It does a very good job explaining the new law buried in the healthcare bill requiring small businesses to issue 1099 forms to people or companies that sell them more than $600 worth of goods or services, and it offers ideas on how to handle all this new paperwork. Read an excerpt below:
Tucked away in the health care overhaul bill that became law this year was a provision that will require small business owners to keep better records of what they buy. They'll also have to report some purchases to the government.
This new law requires small businesses to issue 1099 forms to people or companies that sell them more than $600 worth of goods or services. It takes the 1099 beyond its most common business use, which is to report money paid to independent contractors or freelancers.
The law doesn't take effect until Jan. 1, 2012, which means owners won't have to worry about the paperwork until early 2013, when they're compiling their 2012 returns. But owners whose books and finances are chaotic might want to get themselves organized in the meantime so keeping track of such payments and reporting them becomes routine.
The law, called a revenue provision, was attached to the health care legislation that Congress passed and President Barack Obama signed into law in March. According to Congress' Joint Committee on Taxation, under the new law a business is required to file a 1099 form "for all payments aggregating $600 or more in a calendar year to a single payee."
Between now and the Jan. 1, 2012 effective date for the law, the IRS will be formulating regulations that spell out what businesses must do under the law. Eric Smith, a spokesman for the agency, said that as with any regulations, the public will be able to comment on those regulations before they also take effect.
Because the regulations don't yet exist, it's hard to predict exactly what businesses will have to do to comply.
The law is designed to stop businesses, in this case vendors, from evading taxes on their income. The fact is, there are companies that don't report all their sales, particularly small transactions. But if a customer has to issue a 1099, which reports a payment to the government, the vendor that doesn't report a matching sale could get a letter from the IRS questioning the discrepancy.
There's no getting around the fact that a requirement that companies issue 1099s for purchases will create more work. How big the burden is will depend in part on how many purchases a business makes. But the greater determinant will be how organized the company is. Owners whose accounting system is a pile of receipts jammed into file folders are going to have a miserable time.
The easiest way to keep records of your business purchases is with software that tracks all your expenses. But while software to help small businesses keep their books is relatively inexpensive - some programs cost less than $200 - accountants say many owners are still shy about going high-tech.
The new 1099 requirement might persuade some of the reluctant ones to make the change. Software designed to help run a small business includes payroll applications that can generate 1099s. The companies that make the software will have updated versions that comply with the new law by the time it goes into effect. So the same software that tracks your purchases will be able to create 1099s and make it easy for you to send them to the IRS.
CNN.com also published an informative article.