Another Economic Meltdown: new 1099 rule hurts small business -- badly

The new 1099 rules are a major pain for all small businesses. I foresee major fees and rate hikes as a result. And it may be enough to put many small businesses...out of business.

Let me explain.

I'm a small business owner. A little over five years ago I made it official: I filed articles of incorporation, did due diligence on my business name, invested money in legal and business advisors, got my EIN, opened a business account and got business credit cards.

I've been careful to use my business cards for all business expenses. I mark all receipts, attach to expense reports, include in my business accounting software, file under Reimbursed or Not Reimbursed (because it matters for taxes), and so forth.

I've managed to make it and be profitable despite a tanked economy. I know that my success helps in rebuilding our economy.

But now, I'm deeply concerned that my success is at major risk.

New 1099 rules may put me out of business.

And it's not just my problem, it's yours, too -- it's the problem of every single independent contractor, consultant, small business owner, blogger (yes BLOGGERS)...anyone who does any business and receives money, which includes goods, for services.

Reuters' Lauren Young and Amy Feldman explain:

The new rules on 1099 forms, which were attached to the health care bill and are set to go into effect in 2012, call for all businesses, no matter how small, to file 1099 forms for goods as well as for services. That sounds like a technicality, but it’s got small business up in arms.

Here’s why it matters, and what you need to know.

What exactly is the rule, anyway?

The new rule requires all business to file 1099 forms for goods as well as services, if those goods cost over $600 annually (the current threshold). It also gets rid of the distinction between corporations, which previously did not need to receive 1099s, and unincorporated entities, which did. The rule is slated to go into effect in 2012.

So...WTF? How did this happen?

You can spread the blame around if you like.

U.S. Senate Committee on Small Business and Entrepreneurship Ranking Member Olympia J. Snowe (R-Maine) blames the Small Business Administration (SBA) Office of Advocacy’s failure to submit comments.

Texas tax journalist Kay Bell and the LA Times agree on the popular blame to the US Senate. Kay Bell summarized the LA Times article pretty succinctly:

When it came time today to consider proposals by both parties, each failed to garner the necessary procedural votes to move forward. The Los Angeles Times reports: 

Republicans blocked a Democratic proposalbacked by the White House that would have scaled back the mandate by exempting businesses with 25 employees or fewer and by exempting transactions worth less than $5,000. The cost of altering the proposal was offset by eliminating a tax break for oil and gas companies.

Democrats in turn blocked a GOP proposal that would have eliminated the mandate entirely and also have cut funding for public health programs and exempted more people from having to buy health insurance starting in 2014, a key provision designed to control premiums for everyone.

Now all y'all can go home and tell the voters what you didn't do for them. 

Awesome. So, in order to benefit OIL AND GAS COMPANIES, Senate Republicans blocked it, then counteracted with a proposal that COST CITIZENS HEALTHCARE. In response, Senate Democrats said we can not prioritize business over people's health, which is great in theory until you remember that this affects small businesses, which are made of people! Mostly individuals!

I'm all for PEOPLE are more important than BUSINESS, unless you end up PENALIZING the PEOPLE who ARE the BUSINESS.

I'm furious that big oil and gas get their tax breaks, and meanwhile I get new burdens...enough to maybe put me and people like me under.

So glad we have our priorities straight.

Small business and entrepreneurship are the backbone of this nation -- more than anything they allow people to better balance work and family, achieve goals, and brick by brick create a solid economic foundation. We're the backbone of the US.

Politicians know this; they say it regularly (both parties).

But then...we get this.

So how are you going to fix this, my DC or DC-bound friends?

I havent voted yet so that gives you approximately ten days to tell me why I should vote for you and how you'll save my business, and my access to healthcare -- because these two things go hand-in-hand for small business owners.

Edited to add: Boo ya!! Bank of America just sent me a letter telling me they are adding significant fees to my formerly fee-free business account. In response to bank reform. That's just insult to injury. Someone is getting squeezed to death in the middle and I think it's ME!

I expect also that the burden of many 1099 will force up other fees and rates from services and vendors, including groups that function by servicing small businesses, such as Freshbooks, which I use.

Comments

[Donna]

The conspiratorial part of me wants to think this was a bomb the Republicans placed so they could add weight to their claims that the healthcare bill unfairly burdens small business.

But I don't think they're THAT smart...

I am SO BAD at record keeping-- and since my earnings (and expenses) as a blogger are really small potatoes, so far that hasn't hurt me too badly. My only hope for this is that I will be able to get around this by only purchasing business supplies with my "business" credit card. But I have a feeling I'm just gonna have to suck it up and learn to do a better job of all this. I guess it's time to purchase Quickbooks (which in 2011 will likely adjust to the new requirements).

[jaelithe]

Luckily I am pretty decent at keeping records for my one-woman business, and I don't tend to spend lots of money at single vendors. And since I mostly provide services rather than goods, I was already dealing with the issue of people needing to send 1099s to me, so it won't change my day-to-day work TOO much.

BUT does this mean I need to send Apple or Dell a 1099 for a new computer if I buy one that costs, say, $601? If so, that's ridiculous.

[Kristen]

Gotta pay for the health care bill somehow, Julie.

My suppliers are dumping all accounts and starting from scratch. I'm forced to reapply for credit even though I don't pay on credit. This 1099 requirement is just another outrage to an outrageous legislative year.

I'm impressed at how you managed to blame this on Republicans and big oil. It was an odd track that you followed, but you did it.

I'll blame every senator and congressman who voted for the health care bill. I didn't support the health care bill and this was one of the reasons back then when I read it (something that apparently very few people did). On an unrelated note, my health care costs have doubled and we haven't even ramped up. This is what happens when people don't read bills before voting for them.

And my vote next Tuesday will reflect that.

[Karla Buckingham]

The Conspiracy Theorist in me says they're just trying to save the Postal Service!

[P]

Sorry, by blocking the un American proposal the Repubs saved the small biz. 5k, that would eliminate every restaurant out there. I cannot think of a retail biz that does not buy over 5k a year. They did not attack small biz, they were going for the WHOLE 1099 to be removed, not just limited to tiny biz. I am not a Republican, but I have been watching the Democrats try to pass a bill with hidden bill's/agendas in it. (Healthcare) Do you realize that there is a Real estate sales tax agenda in the Healthcare bill? How? Why? I have come to realize that every agenda and view between the Repubs and Dems are based on class warfare. I do not even make 35k a year, so I thought this could not effect me. I now see I am wrong. Obama wants to Confinscate Money of the Rich to give to the poor for fairness? How is that fair, Equality, hmmm maybe, but not fair. I get the shaft being in the middle. When the rich get taxed for the poor who loose their jobs on cut backs? Me, the lowermid to middle class. 80 years ago, the Fed was too weak, NOW they are way too strong. Not enough Government law's on the books Caused the Great deppresion, NOW too many law's are causing the new one. With more people effected.

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