I’ve mentioned the new 1099 reporting requirements a couple of times already, but now that it’s tax season and the new IRS Form 1099-K is going to finally make its debut, it’s a good time to review the new 1099 rules.

New 1099 Reporting Rules

First, some background on the new 1099 reporting rules… A few years ago the Housing Assistance Tax Act of 2008 was passed as part of the Housing and Economic Recovery Act of 2008. While the main purpose of this new tax law was to provide much needed housing reform, there were other purposes included in the bill, such as the need to improve voluntary tax compliance by small business owners, more specifically, online business owners.

The IRS realizes that there are millions of dollars in tax revenues that are lost due to unreported transactions (known as the tax gap). The majority of these unreported transactions are believed to be online transactions. The purpose of this bill is to try to reduce the tax gap by forcing credit card processors and third party settlement organizations to report certain transactions to the IRS.

Introducing the 1099-K

In plain English, the IRS wants credit card and third party payment processors such as PayPal, eBay and Amazon, to report transactions made by their customers. This means that if you accept credit card payments for goods or services that you sell, or if you use PayPal or another third party to accept credit card payments for goods or services that you sell, you could get a 1099-K this year.

Reportable Transactions for the new 1099-K Form

What is reportable? Basically, any transaction where a payment card (credit card or gift card) is accepted as payment for goods or services is reportable. In addition, any transactions that are settled through a third party payment network (such as PayPal or Google Checkout) are also reportable under the new rules. Transactions that are not reportable include ATM withdrawals, cash advances against the credit card, checks issues in connection with a payment card, or 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 credit card.

Are there any exceptions? Yes, there are two exceptions to note. First, payments made outside the U.S. do not have to be reported as long as the payment processor has no reason to know that the payee is a U.S. person. Second, there is a de-minimis exception for third party payment processors. Third party processors such as PayPal have to report on payees only if they receive $20,000 in gross payments and over 200 payments during the calendar year. That means that if you use PayPal to process your transactions and you earn less than $20,000 or have less than 200 transactions, then you probably won’t receive a 1099-K.

TurboTax® Online Federal Free Edition lets you file federal taxes online – FREE!

How will it be reported? The IRS introduced Form 1099-K to report credit card and third party network payments. This form is required to be provided to the IRS by February 28, 2012. If you expect to receive a 1099-K, it must be provided to you by January 31, 2012. 1099-K forms received in 2012 will be to report transactions that took place in 2011.

Form 1099-K vs. Form 1099-MISC

How is the 1099-K different than Form 1099-MISC?  Form 1099-MISC is used to report income earned by an independent contractor who is not your employee.  Generally it is for services provided, but a 1099-MISC may also be issued for other income earned (fees, commissions, royalties, etc.).  Form 1099-MISC is required when you pay a non-employee $600 or more in a calendar year.  In contrast, Form 1099-K will be issued by credit card processors and third party payment networks and transactions may be either service or product related.  There could very well be some overlap between the two, so keeping excellent accounting records will be a must if you are a small business owner who meets the requirements of both forms.

Double Reporting and Other Concerns

As with any new tax law or form, there are a few concerns. First, the 1099-K will be used to report gross transactions. That means if you have fees, charge-backs, deductions for tips, etc., those won’t be accounted for. You’ll need to keep detailed accounting records so you can deduct those items on your tax return, otherwise you’ll pay more tax than you should. Another concern is that payment processors, especially third party networks like eBay and PayPal will increase their fees to account for the additional bookkeeping and paperwork required. This could put a serious dent in some small business owner’s net profit.

The bottom line is that if you accept credit card payments in your business, those transactions will now be reported to the IRS. Since you should have been reporting that income to the IRS to begin with, it shouldn’t cause you any issues. However, because the law and form are new there are bound to be some complications, so good accounting records are a must.

Finally, you may have heard that there has been some relief granted regarding the 1099-K for the 2011 tax year. Don’t get too excited; the law is still in effect and 1099-K forms will still be issued. However, the penalties and withholding requirements have been delayed for a year, giving payment processors more time to adapt to the new reporting requirements.

To learn more about the new 1099-K, please visit New 1099-K Reporting Requirements for Payment Settlement Entities – www.irs.gov.

Resources:

The IRS has several articles on their site to help taxpayers understand the new 1099-K.  Here are a few worth checking out:

Understanding Your 1099-K
FAQs on Payment Card and Third Party Network Payments
Form 1099-K and Instructions

If you enjoyed this post, please share with others by clicking on one of the buttons below.

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS

{ Comments on this entry are closed }

Tips on Taking the Home Office Deduction

February 19, 2012

If you have an online business, chances are you work from home.  The number of people telecommuting from home and starting online businesses is growing, which means the number of people using their home for business is growing as well.  Since we’re at the start of the 2012 tax season, I thought now would be […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

Social Security Payroll Tax Cut Extended for Remainder of 2012

February 19, 2012

You may have heard that the 2% Social Security payroll tax cut was extended through the end of February in a last minute move by Congress last year.  Well, surprisingly Congress made a quick and early (for them) decision to extend the tax break through the end of 2012. If you’re not familiar with the payroll tax cut […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

What if You Receive Two Form 1099s Reporting the Same Income?

January 25, 2012

One of my concerns about the new 1099-K form is that people may receive two 1099s for the same income.  For example, lets say you are a graphic-designer and you use PayPal to process payments you receive.  You could receive a 1099-K from PayPal (assuming you earn over $20,000 and you have more than 200 […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

Popular Tax Breaks You Won’t See in 2012

January 20, 2012

I found a great article on Kiplinger.com discussing several tax breaks that expired at the end of 2011. The biggest surprise on this list is the lack of an AMT patch. Congress has passed a patch every year for the past few years, and I’m surprised not to see one this year. This will be an unpleasant surprise […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

Tax Carnival #95: Tax Filing Season 2012

January 18, 2012

For filers who do their taxes the old fashioned way, the tax filing season began a couple of weeks ago — as long as they had all the necessary 2011 statements to fill out their paper forms. Taxpayers who prefer to to e-file can hit “enter” tomorrow, Jan. 17. That’s when the IRS starts accepting […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

April 15 Is On April 17 This Year

January 8, 2012

The IRS announced a couple of days ago that taxpayers will have until April 17 to file their 2011 tax returns. Generally if April 15 falls on a weekend, you are given an extra day to file.  However, this year April 15 falls on a Sunday and April 16 is Emancipation Day (a holiday observed […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

2012: A Preview of the New Tax Year

January 1, 2012

2012 should be an interesting year for taxes because 1) it’s an election year and 2) the tax rate is expected to go up in 2013 (when the Bush tax cuts expire). With the economy still crawling along at a snails pace, and with presidential candidates slugging away to get your vote, I’d be suprised […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

IRS Announces Mid-Year Standard Mileage Rate Increase

July 8, 2011

[Update: The IRS recently announced the 2012 mileage rates.  The new rates as of January 1, 2012 are 55.5 cents per mile for business miles, 23 cents per mile for medical miles, and 14 cents per mile for charitable mileage.  This is virtually unchanged from the July 2011 rates; the only difference is that the medical mileage […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →

Will You Receive a 1099 from eBay or Paypal this year?

January 13, 2011

Back in 2008, I reported that eBay and PayPal would have to start sending 1099s out to sellers who use those sites. In the original bill, it was proposed that credit card processors would be required to file Form 1099 (there will be a new 1099-K just for credit card merchants) for each seller that […]

Share and Enjoy:
  • Print
  • email
  • Facebook
  • Twitter
  • Google Bookmarks
  • Digg
  • del.icio.us
  • StumbleUpon
  • Tipd
  • RSS
Read the full article →