Starting this calendar year,  entities running a business have a new tax obligation.  Who is considered to be running a business?  If you file (or should file)  a

Schedule C [unincorporated business],  as part of your 1040 submission

Schedule E [property rental business],  as part of your 1040 tax return,

Form 1065 [partnership],

Form  1120 [corporation],  or

Form 1120S [small corporation or LLC as a corporation],

you are considered to be running a business.  As such, for  any entity for which you expend more than $600 during a calendar year – and plan to deduct those payments  as a valid business response- you must submit a 1099 form by February 2013.  (This form is submitted once a year; one form for each vendor or supplier).

That means you have to properly track your expenses.  Yes, it’s more paperwork- and you can complain all you want, but (1) it’s the law and (2) it will catch many tax scofflaws.  That’s really the goal of this requirement- not to burden you with paperwork, but to collect taxes that are owed- legally.  Too many “small” businesses don’t report their income properly.  That means they don’t pay their fair share of taxes.  The goal of this requirement is to let everyone who collects revenue know that they will  now  be fully accountable to report this income.

About 5 or 6 years ago, the government stipulated that you must provide your lawyers with 1099 forms- because they were not reporting income properly.   It was not clear if that meant to include all professional services (accountants, engineers, etc.)- but we have been advising our clients to do so.

But, what does that really mean for you?  If you are like most of our clients, you have not been diligent in tracking your vendors.  Today, you make a check out to Sandy Stone; next week it’s Stone Throws; a month from now it’s Sanford Stone Throws, etc.   That has to stop.

You should have a completed W-9 from every vendor you reimburse for products or services.  You can download a copy of the W-9 here.   Use the name as the vendor provided it on this form.  Record the Taxpayer Identification Number (Federal Employment Identification Number, FEIN) within your accounting system.

Obviously, we can’t be totally inclusive of our instructions for your accounting system.  But, we will provide you with general ideas.

1. If you use a checkbook and file away your invoices, make sure that you use a separate file for each vendor with the W9 affixed in the file.  Keep a running total for each vendor; once the volume exceeds $ 600, highlight the vendors name so you know this is one that needs a total at the end of the year and an issued 1099.
2. If you use a checkbook and scan your invoices, make sure the W9 is scanned and part of the separate folder for each vendor.  Name each folder with the proper name for each vendor.   Dependent upon your operating system and folder practices, you should track your expenditures; once the vendor has received more than $ 600, add W9 to the end of the folder name.  You can then total these items at the end of the year and prepare your 1099’s.
3. If you use Quicken Home and Business,  make sure (that means to add these folks) are part of the vendor list and add their FEIN on the vendor’s secondary screen.  Rename your previous usage (only for 2011; we don’t care what happened before this) to the proper name of the entity.  You can prepare a report at the end of the year that will provide a list of vendors requiring 1099’s.
4. If you use an accounting system (QuickBooks, Microsoft, PCLaw, Outright,  etc.), rename any vendor that does not match the name as provided on the W-9.  Complete the name, address, and FEIN You can add (to most) a familiar name to avoid using the full name at all times.  Your accounting system can provide a report at the end of the year for any vendor that involved the requisite expenditures.

Of course, you can always call us for help (that’s one of the ways we make money, of course)tracking your vendors, running your business, improving your accounting system, stay complaint with the regulations, or insuring that you pay the minimum income tax required by law.

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