3 Steps to Avoid Form 1099 Penalties


11-26-2010-1

Everybody needs to read this blog today! That’s because I have a prediction of what is going to happen January 2012. The Internet will be clogged with “How do I do this?” type of questions about the new Form 1099 rules.

And the answer will be, “You’re too late. Look for the penalty notice from the IRS and as an added surprise – an IRS audit too!”

Unless Congress changes the laws that are currently set to begin January 2011, business owners and real estate investors alike are responsible for sending Form 1099-MISC to everyone they pay more than $600 in the year.

And you’ve got to get those Form 1099s done by January 31, 2012 (one month after year end.)

Don’t do it and you’ve got a penalty, plus increased IRS scrutiny. And considering the fact that they recently DOUBLED the number of auditors, that’s not a good thing.

Here are three 3 steps to avoid Form 1099 penalties:

Step One: Starting January 1, 2011, get a Form W-9 LINK from everyone that you pay for goods and services for real estate investments and your business. Period. No excuses. Everybody completes a Form W-9 or they don’t get paid.

Some questions I’ve gotten on Step One:

  1. What if they don’t want the Form 1099 in their Social Security number and they haven’t set up a company yet?

    See Step One. (Everybody completes a Form W-9 or they don’t get paid.)

  2. I’m shopping at Home Depot for materials for my real estate rent. Do I really need to get a Form W-9?

    See Step One.

Etc…. Obviously, the bottomline is that until Congress reins back these crazy Form 1099 reporting rules you are taking a HUGE risk if you pay ANYONE without first getting a Form W-9. No excuses. No exceptions. If you don’t, and this rule doesn’t change, you’re going to have a big problem come January 2011.

Step Two: Track all payments (credit card, checks, cash) in a computerized accounting program like QuickBooks, PeachTree and the like.

A spreadsheet is not a computerized accounting program. Manual books are not a computerized accounting program.

Is this an absolute must? No, but be prepared for a lot of tedious work in January because you’re going to have track all goods and services by vendor and prepare Form 1099’s by year end. I suspect most bookkeepers and accountants will be flooded and so it will either be impossible to find someone to do the work, or the fees will be astronomical. (It’s the old supply and demand economic – the more people want something and the scarcer the resource, the higher the price.)

Step Three: Issue Form 1099-MISC in accordance with the rules by the due date.

Just three steps to ensure compliance with these crazy new rules. If you don’t comply, you’ll likely get a penalty and an audit.


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19 Comments so far:


On November 27th, 2010 | 10:20 am
jason said:

do we need 1099 for utility payments? some of our rentals we pay for utilities? How about credit card payments? do i need a w9 from chase or wells fargo for example?


On November 29th, 2010 | 2:11 pm
Diane Kennedy said:

Great questions Jason.

You wouldn’t need to 1099 the utility company (at least at this point). On the credit card, though, it’s not so much that you need to 1099 the bank, but rather the vendor that you used your charge card with. For example, let’s say you charged $200 at the gas station, $100 at Office Depot and $200 for services. You might write a check to the credit card company for $500, but it’s really to pay the underlying services.


On November 30th, 2010 | 8:35 am
Kim said:

How do you go about getting a W-9 from the big companies like Costco, Staples, Etc.?


On November 30th, 2010 | 1:34 pm
Diane Kennedy said:

Kim, I have no idea. BUT we’re going to have to do it, according to this bill.

I’m planning to visit some of the big guys (Costco, etc) with my flip cam when I ask for the Form W-9 and just film the reactions I get. I was thinking I may take a long a copy of the 2000+ page Health Care Bill when I do it.

Let me know what happens when you ask!


On December 2nd, 2010 | 5:26 pm
Kasey said:

Wow, that’s INCREDIBLY burdensome. I think I need to be wearing a heavy windbreaker from the blow back I’m going to receive from my business partners who have to comply with this as well as blow-back from vendors who don’t want to provide us with this info. Seriously, the kid at the gas pump likely won’t have a clue, and his gruff boss will be even gruffier with me when I go asking for info that he likely won’t have.

I want to be able to prove that I’m not just a wacko and show my vendors the section of the new law stating that it’s a requirement to report our payments to them on 1099-MISCs. Do you happen to have a link to the law and know the pages on which it’s outlined?


On December 3rd, 2010 | 1:06 pm
Emily said:

ALL vendors (over $600)?? Seriously?? That’s rather insane.
@MissyCaulk reposted this on her blog: http://media.missycaulk.com/3-steps-to-avoid-form-1099-penalties-diane-ke

Thanks for sharing this… and I, too, would love a link to the law requiring this craziness.

~Emily


On December 4th, 2010 | 8:27 am
Diane Kennedy said:

Oh, Kasey, great question. I’ll do a blog post with the link to the section in the 2000+ page Health Care Bill.


On December 4th, 2010 | 12:06 pm
Kasey said:

That would be wonderful. Thank you. :)


On December 8th, 2010 | 1:04 am
Sharolyn said:

What about a Schedule C? That is where we write off our expenses. I can’t imagine getting a 1099 from each retail outlet that I buy supplies from.


On December 10th, 2010 | 8:47 am
Diane Kennedy said:

Sharolyn, Yes, you will be subject to the same requirements with your Schedule C business. Trying to comply is going to be a nightmare.

We really thought the government was going to change its mind, but so far, no luck. Get ready to start collecting W-9s from all those vendors 1/1/11.


On January 4th, 2011 | 11:25 am
Valerie said:

Some of the bigger retailers out there have gotten ahead of the game by posting their W9’s online (like http://www.staplesw9.com) I’ve just been googling their names and “W9″ and have had some luck finding them (Sprint, T-Mobile, and Pitney Bowes are also online).

For Sam’s Club, I faxed a request to 479-277-7431 and received a W9 the next day. Not a fun process, but I’m relieved that over half of the vendors I’m contacting seem to know what’s going on.


On January 7th, 2011 | 11:29 am
Allen said:

I expect that the future of this program is an official government-reported sales receipt. For a business expense to be deductible, you must have that official receipt. Without it, you are subject to income tax on what is really a business expense.

Other countries do this - Mexico being an example. This is also their way of tracking VAT as the seller reports these sales on a monthly basis.

Some of the larger retail vendors have customer operated kiosks that make this a simple task - scan your receipt, enter your government issued business ID number and the machine spits out an official receipt. Other retail vendors have customer service counters that usually have lines 20+ deep. Small retailers and most service businesses do it the old fashioned way - write it all by hand and submit monthly tax returns that log all sales. Small wonder that the majority of small businesses operate under the radar.

My personal prediction for our future in the US is an IRS-linked accounting system that we will be mandated for all businesses. If you think I am wrong, stop to think about how close we are to that reality today (mandated electronic filing and payment for payroll, mandated electronic filing and payment for sales taxes, etc.)

Next, big brother will be our CFO.


On January 7th, 2011 | 12:52 pm
Diane Kennedy said:

Allen, I was thinking the same thing myself.

In MX, if you have a facturo (proof that the other guy is getting the taxable income reported and it’s taxable), you get a deduction. Otherwise you pay the tax.

I think that’s where we are headed with all of the new Form 1099 reporting. The problem I see is that the US system is much more complicated - states have taxes on top of the federal and there are a lot more people in the US then in MX.

It will create a clear line in the sand - following the law or not. I believe there will be a much stronger underground cash and barter economy. And the people that comply will pay more and more taxes.


On January 8th, 2011 | 12:32 am
Avoid These Prohibited Transactions with Your IRA | USTaxAid Services said:

[...] 3 Steps to Avoid Form 1099 Penalties [...]


On April 27th, 2011 | 7:04 am
Alanna said:

Regarding W-9 and credit cards- you mentioned above that it is the vendors that I use my credit card with (gas stations, restaurants, electronic stores) that I would need the W-9 for. Why is that when I am actually paying Bank of America. Bank of America in turn is paying the gas station aren’t they? Wouldn’t it be Bank of American’s responsibility to obtain W-9s for their vendors?


On January 4th, 2012 | 3:04 pm
jonny said:

i made a big mistake and paid someone before i got their w9 back. They aren’t returning my phone calls or emails. Is there anything I can do or say to get them a 1099 without the w9? I have their address and an invoice.


On January 9th, 2012 | 3:45 pm
Tess said:

Hi Jonny, please go the IRS website http://www.irs.gov and search using ‘Frequently Asked Questions about Backup Withholding’ (or see if this link works).
http://www.irs.gov/efile/article/0,,id=98145,00.html
The rules are in the “What are the first and second annual solicitation requirements?” and “What should I do if a payee refuses or neglects to provide a TIN?” sections.


On July 24th, 2012 | 8:27 am
Misty said:

Was this act repealed? Should I still be getting this from ALL vendors that I pay over $600 to?


On July 25th, 2012 | 11:48 am
Megan Hughes said:

Hi Misty,

Yes, most of the changes were repealed in late 2011. It’s pretty much business as usual with 1099s. If your vendor is a corporation, you don’t need to 1099 them. But if they are an LLC or an individual, you probably do. Check with your local CPA to make sure that your Vendor’s List is set up right, and you’re getting 1099s to everyone who should get one.



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