Small business owners that have been getting by without using software may find it necessary to change thier accounting practices before January 1, 2012. Section 9006 of the Health Care Bill mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. Currently the 1099 form is used to document income for individual workers other than wages and salaries. Although the 1099 requirement for non-corporate taxpayers receiving $600 or more from one source has existed for many years, my experience has been that very few small businesses comply with the requirement. The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations. As the system currently works it would create a paperwork nightmare for businesses and most definitely the IRS. Many business owners and critics are up in arms over the bill and are calling for it to be overturned.
The purpose of the change is to generate additional tax revenues to help cover the costs of the Healthcare Reform. The 1099 trail would expose payments to small operators that might now be going unreported. If you buy a computer for your business from a major chain retailer, the seller almost certainly documents the revenue. But if you buy it from the small business down the street, they might not report and pay taxes on his income from the sale. The IRS estimates that the federal government loses more than $300 billion each year in tax revenue on income that goes unreported. Using 1099s to document millions of transactions that now go untracked is one way to begin to close the gap.
Here is my two cents on the issue: Logically the only way this reform can possibly work is for the IRS to implement a flawless electronic reporting system. Even small business owners should be using some form of accounting software. I speculate that by 2012 the 1099 reporting system will be entirely electronic and all software companies will include a link to the IRS database in their 2012 software upgrades. In effect, the only inconvenience to business owners will be recording tax ID’s in their software for all vendors. Vendors should also begin including thier tax ID on thier sales receipts and invoices. If you upgrade your software and maintain tax ID’s for all vendors, at yearend all you should need to do is press a button within your software to download your data to the IRS database. I believe it is about time the government begin using technology clean up the illegal activities and tax fraud. I don’t know about you but I’m tired of carrying the tax burden for deadbeats.