Small business owners need to read this recent article from The Washington Post. It does a very good job explaining the new law buried in the healthcare bill requiring small businesses to issue 1099 forms to people or companies that sell them more than $600 worth of goods or services and it offers ideas on how to handle all this new paperwork. Read an excerpt below:

Tucked away in the health care overhaul bill that became law this year was a provision that will require small business owners to keep better records of what they buy. They’ll also have to report some purchases to the government.

This new law requires small businesses to issue 1099 forms to people or companies that sell them more than $600 worth of goods or services. It takes the 1099 beyond its most common business use, which is to report money paid to independent contractors or freelancers.

The law doesn’t take effect until Jan. 1, 2012, which means owners won’t have to worry about the paperwork until early 2013, when they’re compiling their 2012 returns. But owners whose books and finances are chaotic might want to get themselves organized in the meantime so keeping track of such payments and reporting them becomes routine.

The law, called a revenue provision, was attached to the health care legislation that Congress passed and President Barack Obama signed into law in March. According to Congress’ Joint Committee on Taxation, under the new law a business is required to file a 1099 form “for all payments aggregating $600 or more in a calendar year to a single payee.”

Between now and the Jan. 1, 2012 effective date for the law, the IRS will be formulating regulations that spell out what businesses must do under the law. Eric Smith, a spokesman for the agency, said that as with any regulations, the public will be able to comment on those regulations before they also take effect.

Because the regulations don’t yet exist, it’s hard to predict exactly what businesses will have to do to comply.

The law is designed to stop businesses, in this case vendors, from evading taxes on their income. The fact is, there are companies that don’t report all their sales, particularly small transactions. But if a customer has to issue a 1099, which reports a payment to the government, the vendor that doesn’t report a matching sale could get a letter from the IRS questioning the discrepancy.

PAPERWORK OVERLOAD?

There’s no getting around the fact that a requirement that companies issue 1099s for purchases will create more work. How big the burden is will depend in part on how many purchases a business makes. But the greater determinant will be how organized the company is. Owners whose accounting system is a pile of receipts jammed into file folders are going to have a miserable time.

The easiest way to keep records of your business purchases is with software that tracks all your expenses. But while software to help small businesses keep their books is relatively inexpensive – some programs cost less than $200 – accountants say many owners are still shy about going high-tech.

The new 1099 requirement might persuade some of the reluctant ones to make the change. Software designed to help run a small business includes payroll applications that can generate 1099s. The companies that make the software will have updated versions that comply with the new law by the time it goes into effect. So the same software that tracks your purchases will be able to create 1099s and make it easy for you to send them to the IRS.

Read the full article HERE.

To read another informative article on this same topic click HERE.

At Harvard Business Services we know that when you start your own business it can be confusing to know what corporate structure is the best decision for you and your business. I just read a great article from Entrepreneur.com that does a fantastic job clarifying some of the confusion regarding a Sole Proprietorship and the benefits of the S-Corporation. Below is an excerpt:

Though there are tax benefits to being a sole proprietor (no employees = no payroll tax–huzzah!), you are personally liable if a legal situation arises. This is especially important for those providing services like construction and financial consulting.

“If you are dealing with individuals’ money that is typically invested in the stock market, this tends to be a very sensitive [and potentially litigious] issue,” says Robert Fuest, principal of LandorFuest Capital Management. “You must understand all of your risks.”

Those risks go beyond just upsetting a client. For instance, a default on a debt or other payment can result in a creditor legally coming after your personal property and assets or other possessions.

Fuest advises new business owners to look at their entire financial situation and take into account any plans to grow and include partners and employees. “The LLC offers more flexibility when it comes to operating and more personal protection,” says Fuest.

Once your sole proprietorship is up and running, Fischer recommends treating your business like a business, something that those who freelance from a home office would do well to remember. “Be professional at all times and make time for things like marketing and networking.”

This includes everything from having professional-looking materials (business cards, letterhead, invoices, etc.), to answering the phone properly and dressing appropriately. Deshayes says this can go a long way toward impressing clients and making them comfortable giving you work.

When purchasing these materials, Deshayes says it’s important to keep personal money and business funds separate. “Keep your books clean and avoid comingling funds, which could open you up to legal liability.”

Though there is no mandatory income threshold, Estill uses a guideline of around $50,000 per year gross as a starting point to consider converting a sole proprietorship to an S corporation (assuming they are not at risk for liabilities–then, forming an LLC would make more sense).

Estill says the primary tax benefit of an S corporation is that the owner controls the payment of employment taxes (via a declaration of salaries or wages). In a sole proprietorship, all net profits are taxed at the self-employment rate, which is currently 15.3 percent on the first $106,800 of net business income.

That rate remains the same for either structure, but the business owner can save some money with the S corporation. They may draw a salary (let’s say half of what they’d declare as net income on a sole proprietorship) and pay the 15.3 percent on that. “The rest of the income flows to your personal tax return on a Schedule K-1, which ends up being subject only to income taxes,” observes Deshayes.

There are costs associated with setting up an S corporation, including filing fees and corporate taxes, but Estill says, “The S corporation can be set up in any of the 50 states with only one shareholder, so it is an ideal business entity for a single-person venture.”

Fuest advises looking before you leap, no matter what the structure. “The laws always change, and depending on the size of the business, you could be at an advantage one year and a disadvantage the next. It really comes down to your personal plans for growth.”

Read the full article HERE.

Question: What Is an ITIN?

Answer: The ITIN number or “Individual Taxpayer Identification Number” is similar to that of the Social Security number. The ITIN is for individuals that cannot acquire the SSN but have tax filing requirements with the IRS. The ITIN is 9 digits in length just like a SSN, but it will always start with a 9. The number was created 13 years ago to assist individuals without a SSN to comply with Federal tax law. The thought process is if income is earned here, then filings need to be made with the IRS, whether you are here legally or not. Not just anyone will receive an ITIN number, the IRS stipulates that the individual requires a filing of a federal return in order for it to be issued. Possession of an ITIN does not indicate permission to work in the US or obtain benefits from the Social Security Administration, it is simply a number to identify an individual to the US tax system.

I was surprised to learn that the IRS is not allowed, by Federal Law, to share any of this information with any of the other US Agencies. This was enacted to encourage filings with the IRS without the fear of retribution, such as deportation. The goal of the legislation was to allow illegal immigrants to pay their fair share of taxes. More than 1.5 million applications for the ITIN were processed in 2008. A recent study by the Treasury Inspector General for Tax Administration took a sampling of 510 ITIN applications and found that 78% of these contained errors, but they were processed anyway. In addition, the government also admitted that more than 55,000 ITIN’s were used multiple times on different returns within a year, with refunds totaling over $202 Million!

If you need an ITIN don’t let the lengthy application deter you from proceeding, as the statistics above show, even if you mess up the application they will still issue the number…..

If you would like information on how to obtain the ITIN number visit http://www.irs.gov/individuals/article/0,,id=96287,00.html