Wednesday, May 05, 2010

I have to issue 1099s!?

Funny I just wrote yesterday about how I don't hate taxes. Today, I'm less enamored with 'em. Or, at least, with the paperwork they entail.

I spent most of today working with my friend Neil to piece together a major and underreported story he stumbled on over the weekend: Tucked into the 2,000-page health care bill is a significant tax-code change. Gotta love how Congress tacks riders and stealth legislation into totally unrelated bills (like tossing "hey, bring your guns to national parks" into the credit card act).

From the story:

An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.

Beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year. The stealth change radically alters the nature of 1099s and means businesses will have to issue millions of new tax documents each year.

"1099 tax form" sounds like an eyeball-glazing thing, but anyone who has ever freelanced knows what it is. Companies send out millions of them each year, to any individual they pay who isn't a salaried staffer. The vast bulk of the money I make comes from my day job, but every year I end up with a few stray 1099s for freelance articles.

Because I have freelance income, in the eyes of the IRS I'm running a small business. That means I file a Schedule C and -- the painful part -- pay self-employment taxes on my freelance income. (You know those Social Security and Medicare taxes you see deducted on your paycheck, which typically add up to 7.65% of your wages? What you're paying is actually only half the tax. Your employer pays the other half. Those who are self-employed get hit with both ends and cover the full 15.3%.)

Like all freelancers, I offset this pain by deducting anything I reasonably can. If I buy a new computer or phone line to use exclusively for work, I write it off as a business expense.

Starting in 2012, the health-care law requires businesses (that means us too, freelancers) to send 1099s not only to workers they pay for services, but to any entity they pay more than $600 to in a year. The example in Neil's story: If you buy an iMac, you have to send Apple a 1099 reporting what you paid for it.

As Neil quipped in response to my shocked "they're kidding, right!?" noises: "It's the Accountant Full Employment Act."

After we thrashed out as many details as possible -- which is not many, considering the IRS is a long way off from issuing guidance on how this will work -- I calmed down a small bit.

On the one hand, while I've received dozens of 1099s over the years, I've never issued one to other businesses. That sounds ... daunting. On the other hand, this is why tax software exists. I imagine Intuit's TurboTax team is doing the dance of joy over this looming tax change. By 2012, when the law actually kicks in, tax software packages should be well-equipped to fire off the millions -- or, as a CPA the Cato Institute talked with predicts, billions -- of new 1099s this will require.

Still. I see why activists are really, really tempted to just chuck the U.S. tax code and start over.