1099 and W-2 Reporting: Changes Under the Affordable Care Act of 2010

Melanie Kidder – Accounting and CFO Advisory Services

All businesses—large and small—will need to change how they report 1099 income and many will need to adjust their W-2 reporting to comply with the 2010 Patient Protection and Affordable Care Act. Beginning in 2012, annual 1099 reporting must include payments for goods (as well as services) and must include payments made to corporations. The Act also requires that W-2 forms report the cost of health care benefits provided to employees.

1099 Reporting

Currently, businesses report amounts paid to independent contractors and other service providers (including individuals, LLC’s, or partnerships) for services in excess of $600 annually. The new legislation amends this to include payments for goods as well as services. In addition, payments for goods or services made to corporations (also in excess of $600) are now reportable.

  • First-tier: Less than 30 days late. Penalty is $30 per form maximum of $250,000 ($75,000 for small businesses).
  • Second-tier: More than 30 days late but filed by August 1. Penalty is $60 per form, maximum of $500,000 ($200,000 for small businesses).
  • Third-tier: Not filed by August 1. Penalty is $100 per form, maximum $1.5 million ($500,000 for small businesses).

Small businesses are defined as those with annual gross receipts (averaged over the past three years) of less than $5 million. Forms not filed due to intentional disregard have a minimum penalty of $250 (per form), with no calendar year limit.

Both the Internal Revenue Service and the American Institute of CPAs are crying foul, citing burdens to process the increased volume of required forms, payer/payee differences in fiscal years, and cash versus accrual reporting that will render the forms useless to the IRS, especially for corporate payment reporting. The effects on small businesses without sophisticated reporting systems may be crushing. Small businesses should also expect increased mailing and storage costs.

What should you do to prepare? Be sure to obtain a Form W-9 from all vendors before making any payments. A policy of obtaining this form for all payments will alleviate the rush in January to gather this information. A Form W-8BEN serves the same purpose as a W-9, and is used for non-U.S. citizens or entities incorporated in another country.

Commentators speculate that the clause changing the 1099 reporting requirements may be amended or withdrawn. But until it is, businesses should prepare to follow the new requirements.

W-2 Reporting

The Affordable Care Act also requires employers to report the cost of health care benefits on an employee’s Form W-2. The law first required compliance effective in 2011 (for W-2s given to employees in January 2012 for the 2011 calendar year), but the deadline for compliance is now 2012 (for W-2s given to employees January 2013 for the 2012 calendar year). Right now, compliance for 2011 is optional. The full text of Notice 2010-69 (showing the new compliance date of 2012) is available at: http://www.irs.gov/pub/irs-drop/n-2010-69.pdf.

For more information about these reporting requirements, please contact Melanie Kidder.