Originally published on PAOO December 29, 2009.
The health care reform bill in the Senate has some provisions that have nothing to do with health, care or reform. They are in there to get some more money coming in. One of them is to eliminate the exception to information reporting where the recipient is a corporation. Businesses that are serious about 1099 compliance probably won’t be affected all that much. They probably already send 1099’s to corporate vendors, since you really don’t know whether an entity is a trade name, a corporation or possibly an LLC. There may be a sever wake-up call for other businesses.
I sometimes get the impression that most 1099’s are sent to people who are actually employees. They will be referred to as “independent contractors” or “contract labor”. There are around 20 factors that distinguish an independent contractor from an employee. I’ve come up with a much simpler analysis. If you ask the question, they are probably employees.
Then there are all these actual independent contractors who show up when you call them – or not, with their own stuff and maybe people who work for them and do something or other that is an ordinary and necessary expense of your trade or business. You get a bill from them and make out a check to Fred’s Plumbing and don’t think about sending a 1099. Those are for the so-called “independent contractors”. You figure they must be corporations anyway. Even though you are an LLC. If you provide services to businesses and are not incorporated how many of your clients/customers send you 1099’s ? They all should.
I didn’t used to worry about this quite as much until I read the IRS audit manual for auto body repair shops. The writer makes the interesting observation that there might be more money in penalties for failure to withhold from the people you should have sent 1099’s than in disallowing deductions.
So for now you can say I could have sworn they were incorporated and hope for the best. You won’t have that out in 2011, but you won’t have to worry about your health anymore. Right ?
Oh by the way :
Any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.