Tax Reporting To Impact Bloggers in 2012
Ready for how the new 1099 rule from the Health Care Reform Law will impact your blog, aside from the extra paperwork costs and the tax ID risks?
For those who do not know what the 1099 requirements are, here is a previous discussion. Remember that the people who will write the rules for enforcing the 1099s requirements are officials for the Department of Health and Human Services (DHH). How much will the DHH understand about how businesses operate? My guess is zero.
Consider the following:
1) Product reviews. Manufacturers may not send out products for review to as many bloggers as they do now, since they may be required to provide 1099s. The smaller companies may try to stay under the 250 forms limit. If the company is small enough, they may restrict their free products to only the sites with heavy traffic. This could leave smaller bloggers with the options of buying products to review or be less competitive in the range of products that you write about.
2) Less income for those selling programs online. There is a huge industry of bloggers selling programs and products to other bloggers and self employed freelancers about how to make money online. Some programs ranges in the thousands of dollars. How comfortable are you at giving your social security number to the random blogger that just sold you a program? Mr. Online Site that I Don’t Know, here is my credit card number, personal info and by the way, my social security number too. There is a risk trade off that bloggers, home based business and freelancers need to decide here.
3) Affiliate marketing – Currently, some bloggers and sites make money by recommending the programs and services of other bloggers via what is called affiliate marketing. These financial transactions may or may not be disclosed to a reader. Will smaller bloggers without the resources to put in all the required monitoring programs for the 1099s become more selective in allowing affiliates? How will the IRS treat affiliate marketing relationships? It’s definitely payment for services (selling a product) between businesses (both bloggers are making money). If bloggers are creating their own affiliate programs, they may need to track the personal information and Tax ID for every blogger who downloads their affiliate link.
One option to handle the issue could be to go through a 3rd party middleman who functions as the seller and give up part of your income for the paperwork and monitoring.
3) Hosting companies – Assuming that you trust a blogger enough to provide tax information to them for a service. Are their hosting company and third party services secured? Are they recording your Tax ID as part of the transaction and it’s sitting on some Southeast Asia server? Microsoft and Google’s systems have been hacked despite the hundreds of millions of dollars that those companies spend on security.
How much do you think your blogging vendor spent on security?
4) Conferences – Many bloggers also run conferences in order to make extra income. I can name at least 10 off the top of my head such as Blogher, Bloggy Boot Camp, Facebook summit, and Blissdom.
Even if the organizers don’t sell a total of $600 or more in products and services to the attendees, they should track the following information: 1) how much sold total to each attendees 2) which attendees is qualified as a business because they made any income off their blogging.
Why? To protect themselves. The attendees are required to track their expenses with the organizers and to send in 1099s to the IRS. If they make a mistake and over report, you need to be able to prove that you did not receive the income. Otherwise, expect to have the IRS investigate you someday.
Tracking and having the reports available are part of the requirements under the 1099 rules set by the Health Care Reform Law.
At the end of the day, it is safest to follow the guidelines and track everyone. The penalty per mistake and the cumulative penalty is quite high and can be $500,000 based on your revenue. When you deal with the IRS, remember that we’re not under normal law. It is based on guilty until proven innocent.
I am bringing up this subject right now even though the requirement does not hit until 2012. You need time to absorb the information and do your own research. This will take several months. Then you will need to figure out how to change or adjust your business to accommodate the law. This will take another few months. Then you will be down to the deadline just before January 1, 2012 to buy the programs and implement your tracking system.
Looking at the 1099 requirements, are there other impacts on bloggers that I missed?
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This is a really interesting topic and one that most people without an accounting or financial background or not going to understand. Heck, it is even hard for me to grasp.
Jennifer, did I manage to explain the issue in a clear enough way? Or was it still confusing?
This is going to hurt the smaller bloggers. Have you heard of anything similar being drafted in Canada? I have not heard of anything, myself, but our politicians tend to follow whatever trends are taking place down south.
I don’t think it will be enacted in Canada. This was part of the Health Care Reform Law. The provision for the 1099 was meant to crack down on smaller businesses and home based / cash businesses so that we could get additional tax revenue to pay for the cost in the Health Care Law. It was projected that the law would help uncover undisclosed business income and generate billions in missing tax revenue for the IRS.
It’s funny (in a sadistic kind of way) how things like this get attached to completely unrelated bills. Sometimes I wonder if Canada hasn’t become more of a free-market country than the US…