Independent Contractor Compliance Blog - by Collabrus™

Under today’s law, if you engage a corporation, or a consultant through his corporation, to perform a service for your company there is no requirement to issue a Form 1099 for the payments made to the corporation. That’s about to change!

H.R. 3590, Section 9006, the Heath Care Bill passed by the House of Representatives on December 24, 2009, and currently in the Senate for reconciliation, changes the current 1099 reporting requirements.

H.R. 3590, Section 9006, requires Form 1099 Reporting for Incorporated Service Providers.

Included in the health care bill is a section that amends the Internal Revenue Code to require that businesses who pay over $600 to a corporation for services must file a Form 1099 reporting those payments.

I told you so…I’ve been reporting for the past year and a half on the IRS’ 1099 lobbying efforts to require third party reporting on corporations (also on IC withholding-see below). 

The IRS has been lobbying Congress for several years to get this law.

A written statement by Nina E. Olson, the IRS’ Taxpayer Advocate, dated February 16, 2007, presented to the Committee on the Budget for the U.S. House of Representatives about closing the Tax Gap, said:

“Under current law, an individual taxpayer can escape information reporting by incorporating. This is true even if the taxpayer is performing the same services that would be subject to Form 1099-MISC (Miscellaneous Income) reporting if the taxpayer were conducting business as an unincorporated entity.

For Form 1099-MISC information reporting purposes, I believe there should be no distinction between taxpayers providing the same services for compensation merely because one taxpayer has incorporated and another has not.” 

Also in her report to Congress for 2008 she again recommended that Congress require service recipients to issue Forms 1099-MISC to incorporated service providers and increase the penalties for failure to comply with the information reporting requirements. 

Why does the IRS want this?

The IRS tells Congress that, “Generally compliance increases significantly for payments that a third party reports (W-2 or 1099)…Moreover, the longstanding regulatory exception from information reporting for payments to corporations has created compliance issues…”

The IRS finally is getting its wish. 

This provision of the health care bill, which appears destined to be passed into law, will take effect for payments made to corporations for services by another business, after December 31, 2011.

What’s next?

I’m predicting that withholding on payments to IC’s and maybe corporations isn’t far behind, but I’ll cover that next time.