Q: In January, my accountant sent out a bunch of 1099s not only to my agency's independent contractors but also to a bunch of other people and companies, seemingly on a random basis. Is there any rhyme or reason for who is supposed to receive a 1099, or do accountants just send these forms out willy-nilly? Also, I have heard that we will have to start sending out a lot more 1099s in the future, due to a requirement in the new health care law. What is that all about?
A: It may be hard to believe, but the Internal Revenue Service has clear rules about who should get a 1099 and who should not. It is just that the rules are arbitrary.
The basic rule is that you must send 1099s to everyone to whom your company paid at least $600 during the year, and you must file copies with the IRS. There are two very large exceptions to this rule:
• First, you do not have to report payments made to corporations, including your independent sales contractors who have incorporated their own businesses; you only report payments to proprietorships, partnerships and limited liability companies.
The exception to this exception is that you must report payments to corporations owned by lawyers, health care providers and (believe it or not) fish sellers, if the payments were for business purposes.
• Second, you do not have to report payments for the purchase of tangible things such as merchandise, furnishings and supplies; you only report payments for services and rents.
However, if you pay a nonprofit for services or if you pay rent to a real estate agent, you don't have to report. I told you the rules were arbitrary!
There are also some minor exceptions to the rules, but these have almost no relevance for travel agencies. As a rule of thumb, just remember what I call the "$600 to people for services rule."
This year, the law's requirements are being simplified: Credit card payments made during 2011 will not need to be reported next year, even if they are for services by individuals, attorneys or health care providers. The theory is that the card issuers report this information to the IRS anyway, so you don't need to duplicate it.
The new health care law has a non-health-care clause that will abolish the exemptions for payments starting in 2012 for all goods and corporations. In other words, you will have to report every payee of more than $600, including ARC or each airline, and every travel supplier to which you transmit over $600.
Small businesses and their associations, including ASTA, are lobbying for repeal of this change, arguing that the IRS does not need an "avalanche" of new paperwork and small business does not need the useless burden. The repeal effort will probably be successful, but we will likely not know for sure until late 2011.
Here is a tax tip: Although, as I noted above, you do not need to issue 1099s to your independent contractors that are corporations, it is still a good idea to do so. There is no penalty for issuing and filing an unrequired 1099, and doing so will help you defeat any attempt by the IRS or other taxing authority to reclassify your contractor as your employee.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email Pestronk at [email protected].