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The Cost of 1099s

Get ready to ensure verification from all the vendors you use. Just what you need when every penny counts.

We knew there might be things in the healthcare bill that would surprise us. What we didn’t know was that these items would extend beyond healthcare benefits and costs. Within the thousands of pages of healthcare “reform” was buried the mandate that W-9 forms would be needed for every vendor with whom you do more than $600 per year of business: Every one of these vendors must receive a 1099-Misc form from your company. From Amazon to Staples (every staple you buy from not just a single form for “Staples”) to UPS, FedEx and other vendors that you have accounts with. Look out Citibank, Chase, and other credit card companies: You will be receiving a 1099-Misc (and its precursor the W-9) from every one of your business customers. Online and traditional retailers and businesses will be busy chasing information on all of their vendors, when previously they were only required to send them to sole proprietors, partnerships, lawyers and a “select” subset of other vendors. Now everybody gets to join in.

I’m constantly amazed at the inventiveness of Congress to find yet another way to increase the cost of doing business. Personally, I have vendors around the country. I undoubtedly do business with at least 10 different office supply stores in my travels; after all, why pay the cost of carrying something on the plane or shipping it when you can pick up what you need when you land? For example, if I need a reference book it may come from any of a large number book companies, be it Amazon, Borders, or Barnes and Noble—wherever I can get the best price and fastest delivery.

I’m not looking forward to identifying every vendor and every vendor’s location. Earlier this year I ordered from Office Depot an item that was filled by TechDepot. Who gets the 1099 form? The company I paid and ordered from or the one that fulfilled the order and will take the return if needed?

Unlikely to Generate Tax Dollars

I find it hard to believe that generating more 1099 forms will generate more tax revenues. Very few of the companies that receive them will be changing their revenue lines—except to increase the price as this new “cost of doing business” adds to the overhead.

If you look at who will be receiving the 1099s, including big retailers, major corporations, and the like, it would be a rare exception when the forms wouldn’t add up to the revenues they already record and report. Well, I take that back: The number of errors and missing forms will undoubtedly raise reconciliation issues, as someone in the company will be required to reconcile millions of customer 1099 forms to the records of the corporation. Personally, for my company I’ll have to issue between 50 and 100 1099 forms when this goes into effect—up from fewer than 20 for lawyers and other vendors for whom I issued them this year.

On the flipside, how many forms will I receive from clients? Between 50 and 100 each year? The joy of annual reconciliation and verification of vendor and customer information increases exponentially! Every vendor file will now have to have the W-9 form completed at the beginning of each year to ensure the information is obtained. Annually, I’ll be asking for updates of information—and also providing it. Sure, you can send out a blanket information document to all your clients. You can provide the information on invoices, contracts and engagement letters. But ensuring verification of the information I’m supposed to receive from vendors? WOW! I may need someone to do nothing but deal with vendors and customer requests for “current” information. Instead of one Staples vendor file, I’ll have one for every location.

From a practical standpoint It will be a recordkeeping pain, but it is doable. It will increase the costs of every organization. But we can increase our rates, right? Or we can absorb the costs and cut our profits; I’m sure this is a tax-deductible expense. I can also elect to do business with fewer vendors. Oh man! How many airlines will I have to send a 1099 to? What about hotels, car rental companies and restaurants? Do I need to send forms to them as well?

The way we do business and the cost has just drastically changed. Will it capture more tax revenue? I don’t think so. After all, those who didn’t report before will not report now. For small and micro businesses, the incentive to do things off the books may have just reached the tipping point.

In a time when businesses need to reduce the cost of doing business to preserve and create jobs, every penny counts. Spending more money on reporting transactions with major corporations, retail stores and the like is an unneeded burden. It is yet another stressor on an already overburdened system. What is Congress thinking? It seems they aren’t. If they were, they would be reducing the burden and cost of compliance and focus on the things that would make an impact. Come November, every small and micro business owner needs to vote for a change—the one we got last time isn’t working.

Lea Strickland is president of North Carolina-based F.O.C.U.S. Resources, an international strategic business consulting firm. She has more than 20 years of experience in operational leadership in Fortune 500 and Global 100 companies including Ford, Solectron and Newell Corporation. The firm guides businesses and university partners through the complex technology transfer process of bringing scientific discoveries to the marketplace. Strickland has written four books including “Out of the Cubicle and Into Business” and “One Great Idea!” and serves as a contributing columnist to TheStreet.com and FOX Business.

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