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