Health Care Reform and the 1099 Nightmare

UPDATE: Taxes are in a constant state of flux, and this is no exception. This provisions of this bill were repealed by by the signing of HR 4 (Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 ) on April 14, 2011. You can read the text of HR 4 here.


My friend, an all-but-overlooked provision of the health reform law is threatening to swamp you with a flood of new tax paperwork. Just a few lines buried in the 2,000 plus page document mandates that beginning in 2012 all businesses will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy $600 or more in goods or services in a tax year.

The 2010 Health Care Act adds

amounts in consideration for property” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and “gross proceeds” (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2)) to the pre-2010 Health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold is met in a tax year for any one payee. Thus, Congress says that for payments made after 2011, the term “payments” includes gross proceeds paid in consideration for property or services.

And with that, the nightmare begins . . . .

So, just how does this affect you? Let me explain.

For many years, businesses have been required to report payments to individuals for “services rendered” on different versions of Form 1099. For instance, when you pay $600 or more during a calendar year to an independent contractor, you must issue the contractor a Form 1099-MISC that reports the amount paid that year. You must also furnish a copy of the Form 1099-MISC to the IRS. Under the rules that currently apply, most payments to corporations are exempt from Form 1099 reporting requirements. However, there are a few exceptions. For instance, payments of $600 or more in a calendar year to an incorporated law firm must be reported. This is because the law firm is providing you a “service.” Payments for goods (such as equipment) do not have to be reported.

But. . . All of that is about to change.

Starting in 2012, the 1099 will function as a tax form for ALL business to business transactions. In a nutshell, you will have to issue 1099s whenever you do more than $600 of business with another entity in a year. That’s a hell of a lot of 1099s. When you buy a $1,000 computer, you will have to get information on the seller and mail 1099s to the seller and the IRS. Paying rent? Send a 1099 to the landlord and IRS.

Recipients of the vast flood of these forms will have to match them with existing accounting records. There will be huge numbers of errors and mismatches, which will probably generate many costly battles with the IRS.

Key Point: For most of you, the new rules will require issuing 1099s for all sorts of business payments that you never had to worry about before. And the IRS will receive 1099s detailing how you spend money on a whole new range of business expenses. However, the healthcare legislation does not require Form 1099 reporting of payments that are made for non-business reasons.

Action Plan

Dealing with the new Form 1099 reporting rules is going to be difficult for many of you — resulting in an avalanche of paperwork. Your business will likely have to modify its accounting procedures to capture payee information that will be needed to comply with the new requirements. Fortunately, the new Form 1099 reporting rules (including any backup withholding implications) don't cover payments made before 2012. So there's still plenty of time to plan for what is likely to be a daunting task…use it wisely! Meet with your tax pro to discuss your situation and what changes you will need to implement in order to be in compliance with the new rules and regs.

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