Legislation Repeal Lightens Reporting Requirements for Businesses

There is good news on the horizon for small and medium sized businesses in Carrollwood and beyond.

On April 14, Pres. Obama signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (HR 4, 1099 Act), which repeals both the expanded Form 1099 information reporting requirements mandated by last year’s health care legislation and also the 1099 reporting requirements imposed on taxpayers who receive rental income enacted as part of last year’s Small Business Jobs Act (PL 111-240). The Senate approved the bill on April 5th, and the House voted in favor of it on March 3.

This important repeal of legislation helped reduce the recordkeeping burden associated with additional 1099 requirements for small and medium size businesses. 

However, small and medium size businesses still must adhere to important Internal Revenue Service requirements on appropriate 1099 designated recipients.  There are strict rules and guidelines for classifying vendors as 1099 recipients as opposed to employees.

This distinction is very important as business owners in many cases try to avoid payroll taxes by classifying vendors as “sub-contracted” workers.  This can cause significant exposure if owners misclassify “sub-contractor” workers and are subsequently audited by the Internal Revenue Service.

Although small and medium size business owners get immediate relief from payroll taxes, the Internal Revenue Service determines if the business should have classified the sub-contractors as W-2 employees. If this occurs, then businesses will be required to pay back taxes with penalties and interest.

In addition, there are other operational factors which should also be considered.  For example, sub-contracted workers may not provide the same value to a company as employees. Employees tend to have a more vested interest in their place of employment than sub-contractors. Sub-contractors may have loyalties to a number of companies. In addition, continuity provided by employees can inherently provide increased levels of efficiencies and create economies of scale to improve gross profit, net profit and corresponding cash flow.

Having referenced the above, these legislative repeals will relieve some of the burdens placed on small and midsized businesses, cutting through some of the red tape making reporting procedures easier as well as reducing the possibility of oversights and inaccuracies.