Form 1099-K Payment Card and Third Party Network Transactions

Starting in January 2013, businesses that accept credit and debit cards when making sales to customers will receive an IRS tax form 1099 K from their credit card processing company. The 1099-K will report the total payment transactions for the year 2012. The new reporting requirement is part of on-going government efforts to increase collection of income tax.

Not only must banks and credit card processing companies comply with the new reporting requirement, third-party networks such as PayPal and eBay, Inc. must also report total credit card transactions to their business customers who use their services to process online sales. Compliance may prove to be a major adjustment for these entities. PayPal, a subsidiary of eBay, Inc., generated more than $31 billion in total net payments in 2009, according to eBay’s annual report for that year.

Exemptions

Not every merchant will receive a form 1099-K; only those who generated both a minimum of 200 transactions and $20,000 or more in sales. Casual sellers should keep in mind that even though they may not receive a 1099-K, their sales income is subject to income tax and must be reported on their tax return. Knowing whether your online garage sale qualifies as a business in the eyes of the IRS can be tricky. But if an online garage sale turns into a business with recurring sales and purchases of items for resale it may be considered an online auction business and the complexities can be manifold.

IRS update – New 1099-k form rules that apply to transportation companies and cab drivers

IRC Section 6050W was added to the Internal Revenue Code as part of the Housing & Economic Recovery Act of 2008. Its purpose is to improve voluntary tax compliance by businesses that accept payment via purchase cards.

According to IRC section 6050W, payment settlement entities (banks and third party payment network processors) are required to issue form 1099-k (merchant cards and third party network payments) to participating merchants reporting all payment card transactions that were processed in prior tax year which in the current scenario is year 2011.  According to the rules and regulations, any transaction that has happened using debit card, credit card or transactions settled through third party payment networks like Pay pal, E-bay must be reported using form 1099-k.

1099k form reporting and regulations apply to every organization and industry that uses electronic payment transactions through payment cards or third party settlement organizations for their business.

1099-k form for transport industry and Cab drivers

1099-k form has impacted every business big and small including the vast transport industry.  Transportation industry including fleet owners and independent cab drivers are required to file form 1099-k. Non compliance with the new rules and regulations by the transport industry could result in hefty penalties.

According to Section 6050W, IRS requires banks or entities such as third party settlement organizations to provide 1099-k form to transport companies that accept credit card as a form of payment for tax year 2011. Transport companies can expect to receive the 1099k form from its bank early 2012. The 1099-k form will report the total gross receipts for the company from credit card transactions processed in year 2011.

On the other hand, besides receiving form 1099-k from the bank or other third party settlement organization, transport companies under ‘aggregate payee rule’ are supposed to issue and file a 1099-k form for each driver that it hires on an independent contract basis. In other words, if a transportation company receives the proceeds of credit card transactions from its bank (or other entity that settles electronic payment transactions), on behalf of its independent contractor drivers who accept credit card payments, and that transportation company then distributes the proceeds to the driver, then in such case the transportation company must issue a Form 1099-K to each driver reporting the gross proceeds from credit card payments.

Hence, under this rule the transportation company will not only receive a Form 1099-K from its bank (or card processor), but it will also have to file a Form 1099-K for each independent contractor driver to whom it has paid or credited amounts on account of fares and tips paid by credit card, reporting the gross amount paid to the independent contractor driver.

Thus if you are an owner of a transport company and have hired 15 independent cab drivers who accept credit cards payment  from passengers and the transactions are processed through your company, then it is your duty to provide each driver a 1099-k form.

There are no 1099-k form filing exceptions for Cab drivers

Many people are asking if there are any exceptions to 1099-k form filing. However till now for payment card processing companies there are no exceptions. A single credit card transaction is enough to trigger the filing of 1099-k form. But, there is a de minims rule for third party settlement organizations which says that third party settle network must have minimum of $20,000 annual gross payment or minimum 200 transactions. However this rule does not apply for credit card transactions or to the "aggregate payee" requirement that a transportation company issue Forms 1099-K to drivers who have accepted credit card transactions.

1099-k form reporting requirement for transport industry and cab drivers

There are certain questions being asked by transport companies such as ‘being an owner of a transport company am I required to file 1099-k form for fares paid to driver using company voucher?’ or ‘Do I have to file form 1099-k or receive form 1099-k from banks if I have drivers as employees?’ The answer to both these questions is NO. Fares paid by credit card are legible to be filed using form 1099-k but not fares paid using company voucher. If your company has hired cab drivers as employees and you pay them monthly salary, then the company will receive form 1099-k from its bank that process credit card transactions but is not required to issue a 1099-k form to its employee drivers.

Certain transactions that trigger the filing of IRS 1099-k form are: lease payments paid by drivers using personal credit card, if a business pays its monthly invoice using credit card and if a customer purchases prepaid cab fare card using a credit card.

However, there are certain transactions that do not require form 1099-k to be filed by a transport company. These transactions include:

• Issuing a credit card to a driver as an alternate form of payment
• Using a debit card to withdraw cash from ATM
• Cash advances on credit card

A transport company before filing form 1099-k should ensure that they have all the information necessary to file 1099-k form. It’s best that the company gets form W9 filled by the driver so that they can have the driver’s tax identification number (EIN, SSN), legal name and address on an official form.

In Order to avoid tax withholding and other possible penalties it is advisable that it is important that companies keep accurate records reflecting the amount of credit card fares submitted by each driver in order to prepare and file an accurate Form 1099-K. Form 1099-k must be filed with IRS by Feb 28^th 2012 for paper filers and by April 2^nd if opting to efile 1099k

IRS update: Considering that this is the first year when form 1099-k will be used by businesses all over, hence IRS is granting penalty relief for inaccurate data submitted on form 1099-k provided that the payer has made a good faith effort to report the correct information, and has actually filed Forms 1099-K in a timely manner and provided a copy to the payee.

The regulations under section 3406 require that backup withholding apply to section 6050W payments made after December 31, 2011, if a payee has not furnished a correct taxpayer identification number (TIN) for form 1099-k. However the backup withholding rule has been postponed and will apply only after December 31^st 2012.

IRS provides penalty relief for 2011 form 1099-k filers

IRS has announced transitional relief from penalties for a section 6050W filer reporting incorrect information on information returns (Form 1099-K) and payee statements filed under section 6050W of the Internal Revenue Code. The relief provided by this notice is available for information returns and payee statements to be filed only in 2012, based on payments made in calendar year 2011, provided that the section 6050W filer makes a good faith effort to accurately file the appropriate information return and the accompanying payee statement.

1099-k form background:

Under section 6050W, added by section 3091 of the Housing Assistance Tax Act of 2008, Div. C of Pub. L. No. 110-289, 122 Stat. 2653 (the Act), a payment settlement entity (“payor”) making payment to a participating payee (“payee”) in settlement of reportable payment transactions must make an information return for each calendar year to be filed with the Internal Revenue Service setting forth the gross amount of such reportable payment transactions, as well as the name, address, and taxpayer identification number (TIN) of the payee. A similar statement must be furnished to the payee setting forth the gross amount of such reportable payment transactions, as well as the name, address and phone number of the information contact of the person required to make such return.

Section 6050W applies to two types of transactions: (1) payment card transactions and (2) third party network transactions. All payments made in settlement of payment card transactions must be reported in the manner described above.

Payments made in settlement of third party network transactions need be reported only if gross payments to a payee exceed $20,000 and the number of such transactions exceeds 200 with respect to the participating payee. The information is to be reported to the IRS on Form 1099-K, Merchant Card and Third Party Network Payments.

Section 6721 imposes penalties on a person for, among other things, failing to include all required information or including incorrect information on an information return. Section 6722 imposes penalties on a person for, among other things, failing to include all required information or including incorrect information on a payee statement. Sections 6721 and 6722 are applicable to section 6050W payers that must file information returns for payments made in settlement of reportable payment transactions.

However, In order to provide additional time to develop appropriate procedures for compliance with these new reporting requirements, the IRS will not impose penalties under sections 6721 and 6722 on payers that must file information returns and payee statements provided that they make good-faith efforts in filing accurate IRS Forms 1099-K and furnishing the accompanying payee statements.

This notice does not apply to a payer who erroneously fails to file information return or payee statement. Additionally, the relief provided by this notice only applies to information returns and payee statements pertaining to reportable payments (form 1099k) made in calendar year 2011.