By: Marshall Kirby, Public Policy Analyst

In 2012 new 1099 IRS tax rules for the self-employed and small businesses are set to take effect.  Under the new system, a business will be required to issue 1099’s for purchases and sales to all suppliers, vendors, clients, and contractors paid over $600 in the course of the calendar year (Senator Baucus Wants).  The goal of the new tax law is to bring in those small businesses [including freelancers and individuals] not currently paying taxes on their services (Roth, Tanya).

First it may help to define what a 1099 is.  In the most general sense, 1099 is an IRS tax form which taxpayers and small businesses must file to report income not earned from salaried employment and not subject to Federal payroll tax.  More specifically, it includes stocks and securities, real estate, interest income, cancellation of debt, and, perhaps most pertinent to the small business person, short-term employment contracts and other services rendered.

Originally, this was an idea from the Bush Administration.  The new 1099 provisions have been enacted as part of the Health Care Reform law from earlier this year (Roth, Tanya).  This provision in the law is estimated to raise $17 billion dollars over 10 years, or an average of $1.7 billion a year (Smith, Ned).  Detractors of this amendment have gone on record saying that the changes will be a major detriment to the business environment for contractors, freelancers, and for small firms.

The National Taxpayer Advocate, Nina Olsen, has stated that the increased paperwork and administrative burden this legislation puts on firms “may turn out to be disproportionate” to any fiscal gain created by this policy (Roth, Tanya). Others have pointed out that in the uncertain economic conditions we face now, it clearly is not the time to increase any taxes on businesses.  Additionally, Ray Keating of the Small Business & Entrepreneurship Council, made similar remarks saying:

Of course, it is important that the mandate be repealed for all businesses and that there be no related efforts to hike taxes. This should be about relieving burdens placed on the entire business community, and not about picking and choosing who benefits, or adding to the tax burden (Smith, Ned).

Following the mid-term elections, Senate Democrat Max Baucus of Montana, has taken action to attempt to repeal the new tax reporting requirements.  Senator Baucus’ statement to the Wall Street Journal saying “I have heard small businesses load and clear and I am responding to their concerns,” reflects the efforts small businesses have made in advocating for and against policies affecting them (Senator Baucus Wants).  Baucus has introduced an amendment to repeal the requirement, but is not alone in his efforts.  Mike Johanns, the Senator from Nebraska, has introduced his own amendment that would repeal the requirement and also give the Director of the Office of Management and Budget (OMB) authority to reduce spending (Senate Fails).  Unfortunately for businesses and entrepreneurs, both amendments were defeated on Monday November 29th (Senate Fails).

It is important to note that it is almost always good tax policy to ensure that all eligible earnings and transactions are brought into the tax system.  This ensures that fairness and accountability is present in public finance and revenue.  However, as this new requirement points out, it’s not just the tax rate which is important in determining a fair and responsible system; you have to account for reporting requirements.  In order for our small businesses to be competitive and continue being the engine to our economy, public officials and policy makers need to understand that additional reporting requirements increase administrative costs and divert needed time and resources away from business operations.

Despite the recent defeat, it is important for business leaders and entrepreneurs to continue to advocate for repeal of the 1099 reporting requirement, as it does not go into effect until 2012.  Additionally, it is equally important to keep the pressure on lawmakers to further simplify small business tax code and reporting requirements which will allow entrepreneurs to reduce their costs.  Simplifying the tax code will create a more entrepreneurial friendly environment, which will allow more people to take control of their future and start a business or become self-employed freelancers.  In a recession, it is important to empower the labor force for more opportunities for gainful employment, and simplifying the tax reporting requirements may be a policy our elected officials should explore. In the words of the Senator Baucus of Montana:

Small businesses are the backbone of our economy and they need to focus their efforts on creating good-paying jobs – not filing paperwork. I have fought hard for small businesses and worked hard this year to pass a Small Business Jobs bill that improves access to capital, stimulates investment and promotes entrepreneurship (Godfrey, Mike).

Further Reading/Works Cited

Godfrey, Mike.  “Baucus to Reduce the Burden on Small US Businesses.”  11/17/2010.

Roth, Tanya.  Top Dem Tackles Small Business Tax Reform.  11/16/2010.

Senate Fails to Repeal Healthcare Reform’s 1099 Requirement for Businesses.   12/2/2010.

Senator Baucus Wants Repeal of 1099 Requirement for Small Business.  11/16/2010.

Smith, Ned.  Democrat Vows to Repeal 1099 Rule for Small Business.  11/16/2010.