1099 Contractors and Healthcare Reform

Jim Baker

Jul 8, 2010

1099 Contractors and Healthcare Reform

Buried in the details of “The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act” is a hidden provision in this health reform law that will require businesses to issue a lot of new tax paperwork.

The health care reform bill, has a few lines buried in Section 9006 (Page 737 of 906) of this document, that beginning in 2012, mandates all persons and for-profit corporations engaged in a trade or business and making payment in the course of such trade or business to another person (or corporation) issue 1099 tax forms. This means a 1099 form must be issued not just to contract workers but to any individual or corporation from which persons and for-profit corporations buy more than $600 in goods or services in a tax year.

Prior to passage of the health care reform bill, IRS Form 1099 has been used to document income for individual workers other than wages and salaries, e.g., businesses issue them to the independent contractors they hire.  This change significantly alters the issuance of the form 1099, requiring businesses to issue significantly more of these tax documents each year.  Under the new rules, for example, a machine shop that buys cutting tools each week from a local distributor will have to send that supplier a 1099 at the end of the year showing their total purchases, if that total exceeds $600.
The bill not only expands the scope of a 1099 by using it to track payments not only for services but also for tangible goods. Additionally, it requires that 1099s be issued not just to individuals, but also to corporations.

This will be a hefty administrative burden for small businesses without large in-house accounting staffs to do the data collection gathering of names and taxpayer identification numbers for every payee and vendor with whom it does business.

The new rules will drastically alter tax-reporting by spotlighting payments that previously went unreported. 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. 1099 forms will capture more forms of income and generate more government revenue to help offset the cost of the healthcare reform bill.

The final impact of the law won't be known until the IRS issues its regulations on the new law, which aren't expected to arrive until sometime next year. The new requirements kick in January 1, 2012.

Rep. Dan Lungren (R-Ca) has introduced the “Small Business Paperwork Mandate Elimination Act” (H.R. 5141) that would repeal the new 1099 requirements. As of June 22 it has 87 republican co-sponsors, but no democratic co-sponsors, and was referred to the House Committee on Ways and Means in April.

Below is how “Sec. 6041 of the Internal Revenue Code” will appear after inserting this new terminology (SHOWN IN BLUE BELOW)

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act
See Section 9006 (Page 737 of 906)

EFFECTIVE DATE: The amendments made by this section shall apply to payments made after December 31, 2011.

EXPANSION OF INFORMATION REPORTING REQUIREMENTS

Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended

  1. by inserting ‘‘amounts in consideration for property,’’ after ‘‘wages,’’,
  2. by inserting ‘‘gross proceeds,’’ after ‘‘emoluments, or other’’, and
  3. by inserting ‘‘gross proceeds,’’ after ‘‘setting forth the amount of such’’

And by adding the following new subsections:

(h) APPLICATION TO CORPORATIONS: Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).

(i) REGULATIONS: The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.’’

Sec. 6041

(a) Payments of $600 or more

All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, AMOUNTS IN CONSIDERATION FOR PROPERTY, premiums, annuities, compensations, remunerations, emoluments, or other GROSS PROCEEDS fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), or $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such GROSS PROCEEDS gains, profits, and income, and the name and address of the recipient of such payment.

(b) Collection of foreign items In the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from foreign corporations by any person undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of exchange, such person shall make a return according to the forms or regulations prescribed by the Secretary, setting forth the amount paid and the name and address of the recipient of each such payment.

(c) Recipient to furnish name and address:

When necessary to make effective the provisions of this section, the name and address of the recipient of income shall be furnished upon demand of the person paying the income.

(d) Statements to be furnished to persons with respect to whom information is required:

Every person required to make a return under subsection (a) shall furnish to each person with respect to whom such a return is required a written statement showing -

(1) the name, address, and phone number of the information contact of the person required to make such return, and

(2) the aggregate amount of payments to the person required to be shown on the return.

The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection
(a) was required to be made.  To the extent provided in regulations prescribed by the Secretary, this subsection shall also apply to persons required to make returns under subsection (b).

(e) Section does not apply to certain tips This section shall not apply to tips with respect to which section 6053(a) (relating to reporting of tips) applies.

(f) Section Does Not Apply to Certain Health Arrangements.--This section shall not apply to any payment for medical care (as defined in section 213(d)) made under--

(1) a flexible spending arrangement (as defined in section  106(c)(2)), or

(2) a health reimbursement arrangement which is treated as  employer-provided coverage under an accident or health plan for  purposes of section 106.

(g) Nonqualified Deferred Compensation.--

Subsection (a) shall apply to

(1) any deferrals for the year under a nonqualified  deferred compensation plan (within the meaning of section  409A(d)), whether or not paid, except that this paragraph shall  not apply to deferrals which are required to be reported under  section 6051(a)(13) (without regard to any de minimis  exception), and
2) any amount includible under section 409A and which is  not treated as wages under section 3401(a).
(h) APPLICATION TO CORPORATIONS: Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).
(i) REGULATIONS: The Secretary may prescribe such regulations and other guidance as may be appropriate or necessary to carry out the purposes of this section, including rules to prevent duplicative reporting of transactions.’’.

(c) EFFECTIVE DATE: The amendments made by this section shall apply to payments made after December 31, 2011.

About The Author

Jim is employed as Sr Consultant Talent Management at the Manufacturers’ Association of South Central Pennsylvania and a member of the Society for Human Resource Management. He is certified as Senior Professional Human Resources (SPHR); past president of MASCPA affiliated Employee Relations Council; past president of Hanover Area Management Association; past president of Hanover Area Human Resource Association; Past president of York Personnel Association, and past chair of Baltimore Industry (OFCCP) Liaison Group. A graduate of York College of Pennsylvania with a Bachelor of Science degree in Accounting, Jim earned his Masters of Administrative Science from Johns Hopkins University. Jim can be reached by emailing jbaker@mascpa.org

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