Yes, Virginia, There is a Santa, But He May Not Be Paying His Taxes Santa and Other Seasonal Employees Risk Making the IRS's "Naughty List"
GRAND RAPIDS, Mich., Dec. 1, 2010 /PRNewswire/ -- Santa might not have made the IRS's "naughty list" just yet, but industry experts anticipate the agency could soon get more aggressive when it comes to ensuring proper wage and income reporting for seasonal workers.
According to Greatland Corporation, a provider of W-2 and 1099 products for business, 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. 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 (payees) must then report this information on their individual tax returns.(1)
Although $2.3 trillion sounds like a lot, the GAO report admitted the IRS has no idea how much tax revenue is lost due to non-compliance on the part of contract employers and employees alike. 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 U.S., many of whom make an average of $8,000 during the holiday season.(2) If each of the nation's 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% non-compliance rate would create the potential $10,432,000 in Santa income that may 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 one 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 healthcare 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 drycleaner.
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 $8.17 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 healthcare legislation, to-date, none have passed.
For Santa, this may mean a number of new elves devoted entirely to tracking payments and issuing these forms.
Grand Rapids, Mich.-based Greatland has an extensive 1099 and W-2 fact center located on its website 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.
Greatland (www.greatland.com) is one of the country's leading providers of W-2 and 1099 products for business. Specialized product lines include: W-2 and 1099 forms and software, business checks and software, income tax preparation supplies and software, and mortgage forms. Greatland is an employee-owned company with locations in Grand Rapids, Mich. and Green Bay, Wis. Follow Greatland on Twitter: @GreatlandCorp.
(1) Source: The Government Accountability Office Jan. 2009 report http://www.gao.gov/new.items/d09238.pdf
(2) Source: The Kringle Group; Dec. 2009 SFGate.com article: Mall Santa Right Jolly About His Seasonal Work
SOURCE Greatland Corporation