New 1099 Tax Form Burden for Small Businesses

In the 1,000+ page health care reform bill, a new tax compliance burden completely unrelated to health care was snuck in unnoticed by the IRS. The full ramifications of this previously unnoticed paragraph is just coming to light the past few weeks.

Here’s the deal.

The provision has to do with the 1099 forms that all businesses are required to file regarding payments over $600 to freelancers and contractors for personal services rendered.

This rule applies to sole proprietor businesses and excluded corporations.

The paragraph basically changes the definition from “personal services rendered” to “all services and goods” rendered from “all organizations” (including corporations)

Basically, this means anytime your company spends more than $600 with ANY other business, you will be required to file a 1099 form. The thinking is that by doing this your suppliers will be forced to report all of their income.

Unfortunately, the cost of this enforcement will be funded by you and me. Here’s why.

It’s kind of a hassle to get a W-9 form from a freelancer to request their Tax ID number. But most businesses, only have a small handful of these, so it’s annoying but not the end of the world.

Now we have to do the same for every company where we spend more than $600.

For example, in my executive coaching business, I spend several thousand dollars a year with hotel chains like Marriott and Hilton. Now I need my bookkeeper to contact their CFO’s office to request their Tax ID.

But wait, it gets better…

If I recall correctly, each Marriott location is independently owned and operated. This means that for EACH Marriott location I’ve stayed in for say more than 4 nights (where my bill would often be over $600), I need to have my bookkeeper contact their financial office and have each location send back a form with their Tax ID on it.

The same goes for the telephone company, Office Depot, Amazon, my web host, all of my favorite restaurants where I host business lunches or dinners, the airport shuttle service, the printer, Apple, Dell, AT&T, the Merchant Account, Hertz, the Attorney, the payroll service, the domain registrar, and more.

It’s hard enough calling their customer service line to give them money, now I have to have someone call them to get a IRS tax form filled out?

I seriously doubt Marriott, AT&T or Hertz is under reporting the income they make from me — but now I’ll need to take on the burden of a few thousand dollars in expense to go chase paperwork.

These are dollars that could have been spent with suppliers (helping them create jobs), or paying new or existing members of my staff (boosting their household incomes… and spending in their local economy), or to invest in marketing to get more new business (which in turn allows me to spend more with my suppliers and staff).

As a business coach, I have gone on record repeatedly to encourage clients and readers that the economy remains highly uncertain. The long term debt problem in the US in particular has not been resolved by the “recovery”.

There are many unforeseen consequences that remain.

This is one of them.

And if by some small miracle enough people complain about the useless paperwork requirements before it takes effect in 2012, then I’m certain there will be another unforeseen consequence to take its place.

While I know many of you feel that the business environment has become hostile to businesses both economically and politically, I actually do think it’s a mistake to let these external changes get you riled up emotionally.

Are these kinds of headaches a problem? Yes, absolutely.

Is it worth more than a passing moment of your time and focus? Definitely not.

Is it excuse for delivering sub-par financial performance this year? Heck no.  That’s a total cop out.

As a CEO Coach, I tell my clients that good leaders deliver the numbers no matter what.

And keep in mind that your competitors face these paperwork burdens as much as you do. So while these kinds of these are a total pain, at least they are equally painful to everyone.

So take small mental note of these recent events, and continue to stay focused on your customers, your company, and your competitors — and generally in that order — and you’ll do fine.