Microbusinesses to be hammered by new 1099 rules

Posted on | June 10, 2010 | Comments Off

tax-forms-by-KOMUnews

(Photo of tax forms by KOMUnews, via Flickr)

A little-publicized provision found tucked away in the health care reform bill is poised to bury microbusinesses under paperwork, according to a survey released last month by the National Association for the Self-Employed (NASE).

The prevision in question would expand IRS Form 1099 information return requirements. Currently, businesses must file 1099s for independent contractors to whom they pay $600 or more during the tax year. Under the new law, that would be expanded to include any vendor — including other businesses, even incorporated businesses.

Not only that, firms would have to get a Tax Identification Number (TIN) from the vendor before they could pay said vendor the full amount. If they never do get that TIN number, you’ll have to withhold a portion of the payment and send it to the IRS instead.

Very naturally, failure to comply involves fines.

The NASE was curious to know how microbusiness owners would be impacted by these new regulations, so they asked. What they learned was that microbusiness owners estimate that their tax compliance paperwork burden will increase by 1250%.

I’m a little fuzzy on how the NASE computed that exactly but let’s take a look at the numbers.

The first thing to note is that microbusiness owners are very, very familiar with IRS Form 1099. Almost 95% of respondents said they were familiar with the form; on average, they issued between about two of them and receive almost four of them in “the most recent tax year.”

But, if they’d had to file a 1099 for every single vendor with which they spent more than $600 that year, the number issued would climb to almost 27 forms. Which, now that I think about it, is probably where that 1250% came from.

So, once they got the time out of the way, the NASE started asking questions about money. They found that close to 60% of their member respondents pay an accountant or other tax preparation professional to help with their taxes and, of them, the largest group (34.8%) pay less than $500 for those services annually.

Another sizable group (31.5%) pays between $500 and $1,000 annually for said services.

Overall, 79.6% of microbusiness owners expect these new requirements to greatly or somewhat increase the amount of time it takes them on tax compliance chores. In addition, 74.3% of them expect the increased reporting requirements to greatly or somewhat increase the amount of money it costs them to comply with federal tax laws.

The one thing the NASE survey does not ask respondents is what they think or how they feel about all this. If I were forced to guess, I would say they probably are a mite unhappy about it.

Parenthetically, this survey sample does not precisely match the profile of microbusiness owners nationwide. Only half of them are sole proprietors, while 28.6% are incorporated and 20.3% are LLCs. Nationally, about 85% of all small businesses are sole proprietorships (including those with employees).

Similarly, respondent firms for this survey make more money than is average for the general population of small businesses. Within this survey sample, 11.3% of the firms said they earned less than $10,000 in 2009. Nationally, the number of small firms earning less than $10,000 a year is appallingly high (something like 50%) but I can’t seem to put my hand on that number right this second.

In spite of the caveats, I don’t think these results should be tossed out by the data police. Au contraire, I think the lot of microbusinesses is probably worse than indicated here, since most micros are smaller and less well-heeled than these respondents.

These are the things I think about when I hear somebody from the Obama Administration assert, with a straight face, that small businesses are central to their economic strategy and that they care about us, really they do!

Yeah, right.


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