Change We Can Be Leavin’

Amongst the many blessings conferred upon a reluctant polity by the recent health-care bill is a little “Easter egg” you may not yet have heard about. (To be fair, I suspect that most of the solons who poked this egregious legislation down our gullets didn’t know about it either, though that hardly redounds to their credit.) It is a grotesquely burdensome requirement that all businesses making purchases totalling more than $600 per annum from any vendor will now have to send that vendor a 1099 form.

An article at Human Events, by Deroy Murdock, assesses the damage. We read:

Form 1099 today applies only to independent contractors, e.g. a graphic artist who earns $1,000 for designing a sales brochure. Come 2012, ObamaCare vastly will expand 1099s to sellers of goods as well as services, and not just the self-employed, but also businesses — large and small.

“This will create a two-fold whammy for small businesses,” predicts Rep. Dan Lungren (R – California) who is sponsoring legislation to repeal this provision. “They will have additional accounting costs that will consume time and money,” Lungren tells me. “They will be required to keep a running tab with every vendor, all the way from restaurants to anything they buy — a piece of equipment, an airline ticket, or a hotel room. And when they reach the $600 threshold, they will be required to file 1099s for each of those vendors.”

“Second,” Lungren adds, “small companies most likely will see less business. Most people will streamline this process by moving to large vendors. Why go to your local hardware stores, since you will have to keep track of several tabs? Why not go to one big box store? As for restaurants, why not go to the chain rather than local restaurants?”

An independent contractor, for instance, will find it easier to consolidate his purchases and send one 1099 to Home Depot, rather than sprinkle his spending among smaller outlets, track those expenditures, and then submit multiple 1099s for Joe’s Ladder Company, HammersRus, Kaminstein Bros. Paints, and Wally’s Wallpaper Warehouse.

“On average, small businesses spend more than $74 per hour on meeting their compliance obligations, which represents the most expensive paperwork burden that the federal government imposes on small business owners,” states Brad Close of the National Federation of Independent Business. Imagine that a small company sacrifices the equivalent of just two hours each month to perform these calculations and file 1099s at tax season. Every year, this would cost — get this — $1,776.

Read the article here. I hate to wish the summer away, but November, and the possibility of repeal, can’t come soon enough.

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4 Comments

  1. Chris G says

    I hate the way they put that kind of thing in a health care bill but I’m all for enforcement of tax law. Afterall, this isn’t a new tax at all it’s just a method of checking to make sure those who are supposed to pay a tax, actually do pay the tax.

    I used to send 1099s to sidemen that I hired. Some of them were incorporated so I didn’t have to send them one. According to the IRS those types of small businesses aren’t declaring all that cash. The article says it will mean $17 billion more in taxes over 10 years.

    For years, I asked every financially savvy person I ran across what the advantages are for incorporating vs. not incorporating. From what I gleamed the big advantage was there are more ways to cheat on your taxes without the IRS getting suspicious. The disadvantage was more paperwork.

    Posted May 18, 2010 at 11:32 am | Permalink
  2. Malcolm says

    I was incorporated for years and got 1099s from my clients; the point was that the transaction constituted freelance employment, and therefore should be assessed as income tax. Now it is being extended to purchases as well.

    Posted May 18, 2010 at 12:37 pm | Permalink
  3. Chris G says

    The other day I heard a contractor (incorporated & licensed) tell my friend that if he pays him in cash then he’ll knock off 25%. This was on the contractor’s first meeting with him!

    I think the way this new 1099 thing is connected to health care is that this subterfuge (businesses not declaring revenues, whether it’s for products or service is irrelevant) will increase dramatically as the health care bill is enacted. There will be added motivation to exploit this tax cheat since they’d likely be paying for healthcare via the tax return.

    Posted May 18, 2010 at 1:41 pm | Permalink
  4. Malcolm says

    You are right, of course, that you can get just about any service more cheaply “off the books” these days. I doubt there was ever a time that wasn’t so.

    The way this new 1099 thing is connected to the health bill is that the government, knowing that its claims of deficit neutrality are pure snake oil, is desperate to find ways to pay for it.

    Posted May 18, 2010 at 2:47 pm | Permalink