Starting 2012, any income that is received through credit and debit card transactions will have to be reported to the IRS by filing form 1099-K (Merchant Card and Third-Party Network Payments).
Financial institutions and merchant card service providers will have to report the annual gross payments which have been processed either through debit or credit card using form 1099-K to IRS and to the merchants. The 1099-K form format is unlikely to be similar to the 1099misc form which is used to report miscellaneous incomes earned by non employees/independent contractors/freelancers.
As the new development has already taken off considering that January 2012 has begun, it would be advisable that payment processors and business owners get ready, prepare the information they need and file form 1099-K and send a copy to the IRS and the recipients as early as possible.
Details of Credit Card and Merchant Payment Reporting
Banks and other payment settlement services will need to report gross annual receipts for each merchant. The income reporting will apply to "any transaction in which a payment card is accepted as payment". Thus, banks and other financial service providers will be reporting the total, gross amount of credit card and debit card payments for the year for each merchant.
Exception for De Minimis Payments
Reporting 1099-K form is not required if
Form 1099-K requires merchants to provide their full information
Since financial institutions will need to report credit and debit card receipts to the IRS, merchants will need to provide their payment processor with the full legal name of the business, their address, and taxpayer identification number. For most businesses, this will be their Employer Identification Number (EIN). As such, payment processors will likely request businesses to provide them with a Form W-9 to obtain this information.
Possible Backup Withholding Issues
Merchants who fail to provide their taxpayer identification number could become subject to backup withholding at a rate of 28% on their payments. To prevent backup withholding, merchants should provide their card payment services provider with the name, address, and EIN for the business.
Another concern is that credit card transactions could become subject to backup withholding if a business commits fraud on their tax payments. Under the proposed regulations, the IRS made it clear that backup withholding would occur on gross card payments. This could leave a business in severe financial difficulties. Business owners who are struggling with tax debts should work with their tax professional to develop a repayment strategy that prevents any withholding on their card payments.
Financial institutions and merchant card service providers will have to report the annual gross payments which have been processed either through debit or credit card using form 1099-K to IRS and to the merchants. The 1099-K form format is unlikely to be similar to the 1099misc form which is used to report miscellaneous incomes earned by non employees/independent contractors/freelancers.
As the new development has already taken off considering that January 2012 has begun, it would be advisable that payment processors and business owners get ready, prepare the information they need and file form 1099-K and send a copy to the IRS and the recipients as early as possible.
Details of Credit Card and Merchant Payment Reporting
Banks and other payment settlement services will need to report gross annual receipts for each merchant. The income reporting will apply to "any transaction in which a payment card is accepted as payment". Thus, banks and other financial service providers will be reporting the total, gross amount of credit card and debit card payments for the year for each merchant.
Exception for De Minimis Payments
Reporting 1099-K form is not required if
- A merchant's total payment transactions for the year does not exceed $20,000, and
- The total number of transactions does not exceed 200.
- A withdrawal of funds at an automated teller machine (ATM) via payment card, or a cash advance or loan against the cardholder's account
- A check issued in connection with a payment card that is accepted by a merchant or other payee.
- Any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the payment card.
How to prepare for credit card and third party payment reporting (FORM 1099-K)
Small businesses will want to review their bookkeeping and accounting practices. Once card payment reporting begins, business owners will need to reconcile the information reports submitted by the banks to their own books. Any discrepancies in reporting will need to be addressed so that accurate tax returns can be filed with the IRS.
One bookkeeping issue is clear; the new law requires banks to report gross receipts. However, merchants often have chargeback, issue refunds, or have debit card transactions where the customer receives cash back. Under the proposed regulations, banks and other payment transaction services will be reporting only gross monthly and annual payments. Fees, chargeback, refunds and other items will not be netted against these gross amounts for IRS reporting purposes. Accordingly, businesses should have thorough accounting procedures to keep track of these items separately. In other words, if you are accustomed to recording only a net deposit from a merchant account, it would be advisable to separate those net amounts into gross receipts and the associated fees and refunds. That way your internal financial reports can be more easily reconciled to the new Form 1099-K.
Small businesses will want to review their bookkeeping and accounting practices. Once card payment reporting begins, business owners will need to reconcile the information reports submitted by the banks to their own books. Any discrepancies in reporting will need to be addressed so that accurate tax returns can be filed with the IRS.
One bookkeeping issue is clear; the new law requires banks to report gross receipts. However, merchants often have chargeback, issue refunds, or have debit card transactions where the customer receives cash back. Under the proposed regulations, banks and other payment transaction services will be reporting only gross monthly and annual payments. Fees, chargeback, refunds and other items will not be netted against these gross amounts for IRS reporting purposes. Accordingly, businesses should have thorough accounting procedures to keep track of these items separately. In other words, if you are accustomed to recording only a net deposit from a merchant account, it would be advisable to separate those net amounts into gross receipts and the associated fees and refunds. That way your internal financial reports can be more easily reconciled to the new Form 1099-K.
Form 1099-K requires merchants to provide their full information
Since financial institutions will need to report credit and debit card receipts to the IRS, merchants will need to provide their payment processor with the full legal name of the business, their address, and taxpayer identification number. For most businesses, this will be their Employer Identification Number (EIN). As such, payment processors will likely request businesses to provide them with a Form W-9 to obtain this information.
Possible Backup Withholding Issues
Merchants who fail to provide their taxpayer identification number could become subject to backup withholding at a rate of 28% on their payments. To prevent backup withholding, merchants should provide their card payment services provider with the name, address, and EIN for the business.
Another concern is that credit card transactions could become subject to backup withholding if a business commits fraud on their tax payments. Under the proposed regulations, the IRS made it clear that backup withholding would occur on gross card payments. This could leave a business in severe financial difficulties. Business owners who are struggling with tax debts should work with their tax professional to develop a repayment strategy that prevents any withholding on their card payments.
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