New Information about Form 1099-K
There’s a new IRS 1099 form issued in 2012: Form 1099-K, Merchant Card and Third Party Network Payments. The 1099 is a series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest, and pension distributions.
The IRS tax Form 1099-K was created as part of the Housing and Economic Recovery Act of 2008, but it did not go into effect until January 1, 2011. The idea of the law was to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.”
There is a “tax gap” between what individuals and businesses owe and what they actually pay. A lot of the tax gap is the result of internet transactions. Consequently, certain payments for products and services paid by credit card (or a third party payment processor) online will be reported on the Form 1099-K.
The new legislation states that payments made to vendors using the following methods are not to be reported on the 1099-MISC: credit cards, debit cards, gift cards, PayPal, and other payment cards. Payments made through these methods are reported by the payment processor (Citi Bank, Chase, PayPal, eBay, Amazon, etc.) using Form 1099-K. (Withdrawal of funds at an automated teller machine (ATM) or a cash advance with a credit or debit card would not be reported under the new IRS Section 6050W.)
Starting as far back as January 1, 2011, the 1099-K is required when a merchant has both 200 or more in payment transactions and $20,000 or more in sales a year. All the paperwork will be done by a bank or a “payment settlement entity” (PSE) and business owners will receive the 1099K in January or February listing their past calendar year’s gross receipts. Furthermore, the law establishes that a PSE may be a domestic or foreign entity. However, a domestic payment processor does not have to file Form 1099-K for payments made to a payee outside the US.
Form 1099-K includes the reporting of both annual and monthly gross amounts. The name, address, and Taxpayer Identification Number (TIN) of each payee is also entered on the form. The TIN could be an individual’s Social Security Number (SSN), or if you
run a business, an Employer Identification Number (EIN). The breakdown of Form 1099-K Merchant Card and Third Party Network Payments is as follows:
Box 1. Will show the GROSS AMOUNT of merchant card/third party network payments received by you during ENTIRE TAX YEAR
Box 2. Will show the 4-digit merchant category code (MCC) used by the payment card industry to classify the payee
Box 3 & 4. Are reserved
Box 5a-5i. Will separate the GROSS AMOUNT of merchant/third party network payments received by you for EACH MONTH of the year.
Here is an example: If a business made $50,000.00 in sales and paid $2,00.00 in fees, Form 1099-K will list $50,000 in gross sales. The GROSS AMOUNT of reportable transactions is the total value paid to participating payees without regard to any credits, charge-backs, fees, cash equivalents, discounts, or refunds. It will be the taxpayer’s responsibility to determine the deductibility of processing charges, chargebacks and returns. A tax advisor can help calculate the appropriate amounts for Business Income (Lines 1a-1d) on the following income tax returns:
1) Form 1040-Schedule C (Profit or Loss From Business-Sole Proprietor)
2) Form 1120 (US Corporation Income Tax Return)
3) Form 1120-S (Us Income Tax Return for an S-Corporation)
4) Form 1065 (US Return of Partnership Income)
IRS Section 6050W rule comes with the “de minimis standard” to exempt casual sellers: if the total payments for the year are less than $20,000 or if the total transactions for the year are fewer than 200. However, 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 internet “yard sale” qualifies as a business (in the eyes of the IRS) can be difficult. Basically, an online yard sale turns into an online “auction business” when there are recurring sales and purchases of items for resale.
Once you’ve submitted the form, the IRS will use the data in one of two ways:
1) If your business receives revenue solely from credit card transactions, the IRS will compare the revenues you’ve reported to the new Form-1099K from your credit card processor.
2) If your business receives revenue from both credit card transactions and cash transactions, the IRS will compare your company’s total reported revenue to industry averages. The IRS will then be able to determine what percentage of your credit card revenue is accurately reported.
The 1099-K forms must be submitted to the IRS by Feb. 28, 2012 (March 31, 2012 if filed electronically). Since March 31 falls on a Saturday, the due date for filing electronically is April 2, 2012).
If you need help with Business Tax Services or your 1099-K forms specifically, the team at BusinessTaxPreparation.com has the expertise to help with all of your business accounting needs. Call the professionals at (866) 676-9417 or email firstname.lastname@example.org for a free, no obligation consultation with a CPA today.