What is this 1099-k and why am I receiving it? How to button up the end of the year..
The 1099-k “Payment Card and Third Party Network Transactions” form is a form required by the IRS to inform them of the amount of credit card transactions a business has processed and includes “the gross amount of all reportable payment transactions” processed by the business. We’ll try to explain in simple terms what this form is intended for, what it means to your business and what you are supposed to do with it.
This requirement is a relatively new law that went into effect only 6 years ago. The 1099-k regulation is a requirement that has been assigned to the payment card processing network and acquiring banks to make them responsible for reporting each businesses total credit card processing transactions to the IRS.
If you accept credit cards for your business your credit card processing network, and/or third party processors such as Amazon, PayPal and Square, are required by law to report the credit card sales of each of their clients to the IRS(since Jan 2012). The 1099-k is the form by which they do so.
It is a form meant to police merchants to make sure that as taxpayers they are reporting the correct amount of income from the year. The goal is that the IRS can then compare the reported amount of sales to the amount of income the business claimed and reported on their tax return, and then notify taxpayers when they find any discrepancy.
What types of businesses will receive a 1099-k?
This regulation will affect everyone except for the smallest of businesses and sellers. The provision states that you are required to have a 1099-k reported for you business if your sales volume is over $600 per year through a credit card company and if you process over $20,000 in volume and more than 200 individual transactions through a third party processor.
Keep in mind that even if you do not qualifying for Form 1099-K you are still required to report your sales activity to the IRS. Even if you don’t receive or qualify for a 1099-K you may still be responsible for paying taxes on your sales income. Make sure you are talking to a tax advisor to ascertain what your tax obligations may be.
While it sounds pretty simple there are some complication you will want to stay on top of to make sure everything goes smoothly when you file your return.
The first headache involves your legal business name and tax ID on file with the merchant service provider not being a perfect match to the IRS files. Your TIN(taxpayer Identification Number) must match EXACTLY-
If for any reason your TIN is different than the legal name on your merchant service account and the one on file with the IRS your processor will be required by law to withhold 28% of your payment card transactions. How is it that your business name could come to not match what’s on file with the IRS? Believe it or not it’s pretty easy. Many times a business has registered for their TIN many years ago and over the years what they use as their business name has just morphed a little. Usually simple things like substituting an & sign for the word “and” or abbreviating something like Inc. Even something as simple as forgetting the comma before LLC (My Dream Biz, LLC) can cause your business to fail verification with the IRS. This is just a big headache because the IRS will only note that there is a variation in the business name but will not provide what they have on file or exactly where the discrepancy is found in the name. So any accidentally transposed number or a misspelled word, the use of a symbol, or any other small change could be a possibility. Making sure that your merchant account is cohesive with your original paperwork filed with the IRS will save you time, frustration and money.
If you have been processing with the same merchant provider for a few years chances are there is no problem or it has already been taken care of. If you switched merchant account providers than you may want to be proactive and make sure there aren’t any problems.
When you filled out your application for you merchant account your processor would have registered and sent in for verification with the IRS at that time. Within 1-2 weeks they would have been notified if there were any of the discrepancies we spoke about. The merchant service provider would have then informed you of the issue by either notating it on your statement or through a phone call or email. The problem is that many business owners are very busy running their business and sometimes things like this can fall by the wayside. They may not look closely at their statement or an email can be overlooked as just a sales notice or sent to junk mail. For these reasons it is always important to pay at least some attention to your statements, any special mailings you receive from your processor, and especially any phone calls notifying you of information that is not matching.
IRS regulations require that the payment processor reports on the form the total gross amount of payment card transactions that were processed throughout the calendar year. This means that they are reporting the total dollar amount of all payment transactions without taking into account any adjustments that may have occurred, such as credits or refunded amounts, discounts, fees (processing fees), or any other amounts that may be deducted from your income. Obviously you will want to keep detailed records(I’m sure you already do!) to make sure that you can correctly calculate the amount to be reported and make sure this corresponds with your P&L.
If you bought or sold your business during the year there may be income included that happened before you purchased or even after you sold the business if the TIN or business name that is associated with the credit card terminal was not updated after the sale/purchase.
There are some circumstances where a merchant may share their terminal with another person or business- then the 1099-k would include the sales of the other business as well as your own. You will need to have detailed records to show you paid out that income to the business.
Sometimes businesses change the way they are structured during the year by changing from a partnership to a sole proprietor or incorporating and fail to notify the merchant service provider, letting them know to associate the terminal with the new entity’s information and tax return.
All of these are scenarios that can cause a hiccup that is better taken care of now, before the end of the year.
If you believe that there may be a discrepancy on your account or have previously heard from your merchant provider stating that you needed to update your account and have yet to take care of it don’t hesitate any longer. Trust me, we do not want to have to police this regulation for the IRS and we certainly do not want to have to hold 28% of your funds! As always, we are here to help and support our business partners in their success! Call Bankcard Brokers today, we welcome any questions you may have about your account or your 1099-k form before crunch time!This article is for informational purposes only, and not meant to substitute for tax advice. If you have questions about a 1099-k you believe you will receive be sure to seek advice from a certified tax accountant.