1099 Reporting Requirement Hanging By Thread

By February 3, 2011 Businesses

Technically, Obama’s healthcare law is now void after a federal judge in Pensacola, FL ruled the entire law unconstitutional.  However, the law is now headed for the appeals process and eventually the Supreme Court.  In the meantime though, repeal efforts are being bounced back and forth between the Republican controlled House and Democrat controlled Senate.  However, in a vote last night the Senate made it clear that the 1099 reporting rule in the healthcare law will not survive.
The repeal failed in the Senate on a 47-51 vote.  But the repeal of just the 1099 reporting requirement got 81 votes and should easily pass the House.  President Obama signaled in his State of the Union speech that he was willing to reverse policy and sign a removal of the 1099 reporting requirement if it reached his desk.

Right now, if your business pays any individual or lawyer more than $600 throughout the year in non-employee compensation, you need to send them Form 1099 reporting those payments.  There are penalties for not filing these forms, and increased penalties if those workers are reclassified as employees and no 1099s were filed.  The new requirement as part of the healthcare law will make businesses have to file Form 1099 for any individual or business that they pay more than $600 to throughout the year.

This requirement would make businesses send 1099 forms to large retailers like Wal Mart, Best Buy, McDonalds, etc.  To make things more complicated, credit card companies would be required to file 1099s covering expenses paid through their cards.  In other words, if you spent more than $600 at McDonalds, half on credit card and half in cash, you would need to take your total spent, subtract the amount spent by credit card, and send a 1099 to McDonalds reporting the remaining amount.

This new requirement was a jaw-dropper for many business owners who could see their 1099 preparation fees increase exponentially if the law survives. In November the AICPA called on Congress to repeal the requirement.  The US Chamber of Commerce has also called for a repeal, citing the huge burden this would cause for small businesses.  It now appears that after some initial resistance the requirement will be easily repealed.

Part of the reason for the resistance to repealing the 1099 rule is how much such reporting was estimated to increase government revenues.  It was estimated that the 1099 rule would save $17 billion over ten years.  The healthcare law passed through the use of Budget Reconciliation meaning that it had to reduce the deficit in order to pass.  Eliminating revenue raising portions of the law, such as the 1099 rule, undercut the premise for its original passage and could aid the existing legal challenges against the law.

Only time will tell, but we will keep you posted!