The 1099 Landmine

The Senate will take a vote today to repeal the hugely onerous 1099 provision from the Obamacare legislation.   Good news, though Obama is opposed to the repeal as he feels (probably correctly) that it will open the floodgates to further repeals and amendments.  Which is pretty disingenuous, as one of the soothing memes he handed out when the legislation was being rushed through Congress was that there was plenty of time to amend and fix its rough edges.  How he needs to decide if he was lying about that, as Congress addresses a rough edge that had nothing to do with health care but created a huge and largely useless burden on businesses.  I know that this provision would really kneecap my business.

Meanwhile, small businesses are staring in horror toward 2013, when the 1099 mandate will hit more than 30 million of them. Currently businesses only have to tell the IRS the value of services they purchase from vendors and the like. Under the new rules, they'll have to report the value of goods and merchandise they purchase as well, adding vast accounting and paperwork costs.

Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations' corporate parents.

Most Democrats now claim they were blindsided and didn't understand the implications of the 1099 provision"”which is typical of the slapdash, destructive way the bill was written and passed. As the critics claimed, most Members had no idea what they were voting on.

Democrats are trying to water down this repeal:

Yesterday the White House endorsed a competing proposal from Florida Democrat Bill Nelson that would increase the 1099 threshold to $5,000 and exempt businesses with fewer than 25 workers. Yet this is little more than a rearguard action in favor of the status quo; the Nelson amendment leaves the basic architecture unchanged while making the problem more complex.

Businesses would still have to track all purchases, not knowing in advance which contractors will exceed $5,000 at the end of the year. It also creates a marginal barrier to job creation"”for a smaller firm, hiring a 26th employee would be extremely costly. The Nelson amendment also includes new taxes on domestic oil production, as every Democratic bill now seems to do.

This analysis is dead on -- our company generally cannot predict exactly how much we will purchase from a specific vendor in a year, so we would still have to collect tax ID's from every single vendor, not knowing which would cross the hurdle.


  1. perlhaqr:

    And so the IRS becomes the Central Planning Office.

    They can't micromanage the economy if they don't have data on every little aspect of it. And just think of how many more IRS employees they could hire for their little central bureaucracy if they had to process all those extra bits of paper!

  2. EscapedWestOfTheBigMuddy:

    "Most Democrats now claim they were blindsided and didn’t understand the implications of the 1099 provision—which is typical of the slapdash, destructive way the bill was written and passed. As the critics claimed, most Members had no idea what they were voting on.

    This is not an excuse, however, it is an indictment.

    Voting for a bill without understanding the contents and implications is per se dereliction of duty. It is simply inexcusable to exercise the sovereign power in so random a way.

    A pox on all their houses.

  3. Doug:

    But ... but ... how could anyone vote for amateurs and rookies to replace our professional politicians who so wisely voted for this legislation? We need MORE Nancy Peloskis, not fewer.

  4. Griffin3:

    I figured this provision would die due to non-compliance, similar to the rollback of the state traffic cameras in Arizona. My wife is not going to collect tax IDs; some will in this small town, but most wont. Maybe after a couple years of confusion -- you want to predict the IRS's ability to sort things out with random audits if there's 50% compliance on this?

    On the other hand, I'm giving out my SSN to random customers who ask ... NOT! If they hold my check, they'll get a nine digit number, all right ... and some mild ongoing computer problems.

  5. Brian Dunbar:

    I know that this provision would really kneecap my business.

    I am pretty sure a clever programmer can come up with a bit of hackery to make the process less painful.

    Although I am less sure of this after reading the specs for submission of 1099 forms. Cleaver is one thing: having to work around a horde of clerks doing data entry on punch cards (I'm kidding, only slightly) is another.

  6. Jim:

    Looks like the amendment was rejected. Ooh, big surprise. For show, 7 sacrificial D's voted for it.

  7. Matt:

    I doubt even the IRS really wants this monstrosity. It adds a lot more work for them (as well as for the businesses that have to comply) and doesn't generate meaningfully more revenue. In fact, the cost of merely _processing all the extra data_ (to say nothing of detecting and punishing noncompliance) would almost certainly exceed whatever increased tax revenue could be squeezed out this way.

    As a business owner, I wince at the amount of extra hassle I'll have to face if this ever goes into effect. But it's only the kind of wincing that just about all news from Washington causes. As an IT professional putting myself into the metaphorical shoes of the IRS, on the other hand, the wincing escalates to "Surgery Channel" levels.

    So congratulations, Congress. You actually passed a law so bad that it made me, a small-government tax-avoiding hardcore-libertarian borderline-anarchist, feel sorry for the IRS. Bravo.

  8. jt:

    I've just realized that it isn't just a matter of issuing a lot of 1099s to our own vendors--I'm also going to get bombarded with requests from big companies who will want a list of purchases from us by their individual employees. That's going to mean literally hundreds of custom database searches that we'll have to run. Aargh.

  9. perlhaqr:

    Matt: That would only matter if the IRS were a business, and thus, concerned about showing a profit. Their product isn't "tax revenues", it's "paperwork filled out properly". So the more paperwork there is to do, the more money that flows into their incoming budget and the more power some petty bastard there has.

  10. Jehu:

    Want a terrific job-creating program that Congress could pass? It would even cost a negative amount of money...
    Just take all the constants in the various administrative codes relating to businesses, the ones that say---this applies to companies with more than N employees---and double them.
    After all, weren't most of those written back when the US had only about half the current population anyway? :-)
    I suspect there are lots of little businesses bunched up around the various thresholds for regulatory compliance.

  11. ParatrooperJJ:

    Matt- The IRS is salivating at this new law. They get over 16,000 new employees and since the law is basicly impossible to comply with, they have a automatic issue to penalize on in an audit.

  12. Methinks:

    Agree with Paratrooper - although, I think the IRS is too stupid to salivate.

    Personally, I think one of three things is going to happen - they won't enforce this law, they'll amend or repeal it before it comes into effect or they will extend the time line for compliance.

    This is something that is possible to impose on a booming economy with 4.5% unemployment. Threatening businesses with a giant new tax (and a tax is exactly what this is) while the economy sputters and pukes and unemployment hits European levels is going to be very unpopular.

  13. Ignoramus:

    I heard this new 1099 rule was cooked up because in theory it would generate some assumed amount of better tax compliance over the next decade. This assumed amount was then used in the CBO scoring of Healthcare so that Obama & Co could then tote the fiction that Healthcare will reduce the deficit over the next decade.
    My paranoid side instead saw the new 1099 rule as laying the groundwork for a VAT further down the road.

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