Santa might not have made the IRS's naughty list, but industry experts anticipate the agency could soon get more aggressive when it comes to ensuring proper wage and income reporting for seasonal workers.
The IRS requires businesses to file a 1099-MISC form for any contract worker they pay at least $600 for services, including seasonal workers and freelancers, according to Greatland Corporation, a provider of W-2 and 1099 products for business. A recent report by the Government Accountability Office (GAO) noted that for 2006, 1099-MISC forms reported approximately $2.3 trillion in seasonal and contract labor wages. In turn, recipients of these forms must then report this information on their individual tax returns.
Although $2.3 trillion sounds like a lot, the GAO report admitted the IRS has no idea how much tax revenue is lost because of non-compliance on the part of contract employers and employees. As a result, the GAO expressed its concern regarding this "window of opportunity for payees to underreport their income and go undetected by IRS . . . representing a significant problem."
The IRS estimates an overall 16.3 percent non-compliance rate (including seasonal and contract workers), meaning a significant amount of wages and income are not being reported accurately, or at all, by businesses or organizations. This non-compliance hurts the ability of the IRS to detect underreporting of income by individuals and, as a result, contributes to the estimated $345 billion tax gap.
Take Santa, for example. There are approximately 8,000 professional Santas across the United States, many of whom make an average of $8,000 during the holiday season, according to reports. If each of those 8,000 Santas made $8,000 in annual income, the total contract labor reported to the IRS would be $64 million. But, according to the above statistics from the IRS, a 16.3 percent non-compliance rate would create the potential $10,432,000 in Santa income that might not be reported.
By IRS standards, the above Santa example doesn't illustrate a huge sum of missed or underreported income. However, when you look at the total number of seasonal and contract workers that account for $2.3 trillion amount of taxable payments annually, the total non-compliance figures could be staggering. The GAO report states that even a 1 percent increase in all reported 1099-MISC payments could result in an additional $60 billion in taxable income reported to the IRS.
In 2012, it will take even more care to avoid ending up with a stocking full of coal from the IRS. A new provision in the health care reform legislation is aimed at improving reporting and closing this particular gap. It will require all businesses to not only issue a 1099 to document wages paid to contract workers, but also issue a 1099 form to any business from which they purchase at least $600 in goods or services. Using the above example, if Santa dry cleans his suit 20 times during the year at a cost of $30 each time, he will have to issue a 1099 form to his dry-cleaner.
By expanding 1099-MISC reporting to include service-and-goods payments of $600 or more to corporations by third-party payers, it is estimated that an additional $8.2 billion over a 10-year period would be generated because this increased reporting would enable the IRS to detect underreported payments.
The burden, of course, falls on the many small businesses around the country that will need to have the processes and systems in place to handle the nearly tenfold increase in reporting and tax forms. While, there have been efforts to repeal this portion of the health care legislation, none have passed to date.
For Santa, this may mean a number of new elves devoted entirely to tracking payments and issuing these forms.
Grand Rapids, MI-based Greatland has a 1099 and W-2 fact center located on its Web site with answers to many other filing questions. The company recently launched speedEfiler.com, a new Web-based wage-reporting tool that enables small and mid-size businesses to file their W-2 and 1099 forms online, and have copies printed and mailed directly to employees or recipients.