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Heard on the StreetCWS 30 June 2.12

CWS 30

A few lines tucked away in the Patient Protection and Affordable Care Act of 2010 (the new health reform law) will require U.S. companies to issue 1099s to every business with which they spend $600 or more, not just individual contract workers. Starting in tax year 2012, the law expands 1099 coverage to tangible goods and services, thereby also expanding not only reporting but data collection for every payee and vendor with which companies do business throughout the year.

Earlier, one way one could skirt the issue or the visibility of being an independent contractor was to incorporate; 1099s were never required for someone that was legally incorporated, though a 1099 could be issued to an individual or a big organization. So if a 1099 was not issued, then incorporated individuals or firms could under-report their income to the state and federal governments.

But the IRS is now on the war path and wants to close the tax gap. The agency has estimated that the federal government fails to collect $290 billion a year in tax revenue on income that is not reported. Tax analysts think that compliance across the board will increase as the new provision requires third parties to do the reporting. Corporations will ensure that independent contractors will receive 1099s; the contractors in turn have to claim income (which has already been reported) and pay taxes on it.

For example, under the new rules, a freelancer who buys a new computer from the local Apple Store will have to send Apple a 1099. A company that buys raw materials used in its manufacturing will have to track those purchases throughout the year and send all of its suppliers a 1099 by Jan. 31 that tallies the total spent.

Given the complexities involved, companies are better off consulting with tax advisors and third party compliance firms to help with tax preparation. There is time to plan and work with experts for what appears to be a daunting task.

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