To help combat underreporting of income by businesses, banks and credit card payment providers (e.g., eBay, PayPal) are now required to report gross annual payments processed by credit or debit cards to both the Internal Revenue Service (IRS) and to merchants on Form 1099-K, "Merchant Card and Third Party Network Payments." Consequently, small business owners may want to evaluate their bookkeeping and accounting practices to ensure there are adequate and effective systems in place to reconcile the information reported by banks and credit card payment providers with their own records. Any discrepancies in reporting should be addressed to ensure that accurate tax returns are filed with the IRS; otherwise, the risk of audit or inquiry by the IRS is high. It may be prudent to consult with your tax practitioner to discuss your unique facts and circumstances.
The new Form 1099 reporting requirement (for the 2011 tax year) for payment settlement entities, such as banks and credit card payment providers, require these entities to report information reflecting businesses that provide annual deposits totaling more than $20,000 and process more than 200 debit card or credit card transactions. In other words, for any business that is selling goods or services and receiving payments through a payment processor, the gross annual receipts will be reportable as income, if they exceed the thresholds noted above. The reportable income applies to any transaction in which a payment card is accepted and is to be reported utilizing Form 1099-K, with copies sent to the business and the IRS.
To meet the new reporting requirements, merchants will need to provide the full legal name of the business, their address, and taxpayer or employer identification number for businesses. As such, banks and payment providers will likely ask businesses to provide Form W-9 "Request for Taxpayer Identification Number and Certification" to obtain this information. Beginning in 2013, merchants who fail to provide this information will become subject to mandatory backup withholding, which requires payers to withhold 28 percent of the payment to the merchant.
A number of bookkeeping challenges are associated with compliance. The law requires reporting of gross annual receipts. Therefore, any fees, chargebacks or issued refunds should not be netted against these gross amounts for 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 prudent to separate those net amounts into gross receipts versus the related fees, chargebacks and refunds. This can help ensure that your books and records are more easily reconciled to the Form 1099-K.
It may be worthwhile to consult with a qualified tax professional to determine which reporting requirements apply to you based on the unique facts and circumstances of your situation.
If you have any questions regarding this article, or would like further information, please contact Michael R. Bartosik, CPA, CFP, of the Tax Accounting Group or the practitioner with whom you are regularly in contact.
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