We’re about to see a huge shakeup in 1099 reporting, beginning next year. This week we’ll be telling you about what to expect, and how to begin tracking information you’ll need.
First up, the 1099-K. This one was enacted back in 2008, as part of The Housing and Economy Recovery Act, and impacts everyone who accepts credit cards or other forms of payment (PayPal, etc.)
Any credit card processer that processes debit cards, credit cards, gift cards and electronic payments (i.e., banks, merchant accounts, PayPal, etc.) for you or your business will now be required by law to track those sales and report certain sales to the IRS on a monthly basis, starting on January 1, 2011. Once a year those processers must also prepare a new kind of 1099 form (called a Form 1099-K) that shows your gross sales and issue that to you or your business. You or your business will need to report that 1099-K on your tax return. You will begin getting 1099-K’s in January of 2012.
The IRS has stated for years that online retailers, especially small operations and sole proprietors have been underreporting their income. And, just as 1099s have forced independent contractors to report their income more accurately, the IRS is counting on the 1099-K to do the same thing for online sellers.
Not everyone or every business will be affected. There is a minimum threshold of $20,000 and 200+ transactions. Take in $18,000 in electronic payments? You won’t get a 1099-K. Have 199 transactions and you won’t get a 1099-K either.
Not all credit cards will be monitored. Single retailer, private cards (for example a Sears card that is usable ONLY in Sears) are exempt.
Not all transactions must be monitored. If you use your credit card or payment card to obtain a cash advance or a loan, or you withdraw money from an ATM using that card, the transaction will be exempt.
Convenience Checks don’t count. If you use the paper convenience checks for purchases or cash advances, those won’t count either.
Government Payments are NOT exempt. If you use a government benefits card (i.e., with food stamps, welfare or unemployment), those transactions are not exempt, and will be tracked and reported (if you hit the reporting threshold).
Quasi-Private Label/Mall Cards Transactions made using a quasi-private label card or mall card are NOT exempt and must be tracked and reported (if you hit the reporting threshold). Basically these are cards that allow you to shop at any one of a number of specified retailers, who may or may not be connected.
Don’t Have an EIN? Time to Get One. The Form 1099-K will allow you to provide either a business EIN (employer identification number) or your Social Security Number. With ID theft rampant, it will really be in your best interests to apply for an EIN, whether you’re an incorporated business or operating through a Schedule C Sole Proprietorship. A Schedule C business can obtain an EIN in just a few minutes, through the IRS website.
Non-Compliance is NOT an Option If you don’t provide your merchant processors with either an EIN or your SSN, you’ll lose out. Starting in 2012, processors must begin something called “backup withholding” on all payments that don’t have proper identification numbers. In other words, if you don’t provide an EIN or SSN, the merchant processor will deduct a certain percentage in income tax from your payments, and send that along to the IRS.
Good Bookkeeping Will Be Critical. The IRS has now issued final regulations, which you can find here: (T.D. 9496) It will be vital for you to carefully track chargebacks, merchant processing fees, cost of goods, etc., as those aren’t fully dealt with in the regulations. To make sure you don’t wind up overstating your income, you will need to have good bookkeeping records that clearly show all of the deductions from that gross income.
In the final IRS Regulations, the chargeback issue was addressed … sort of. The IRS noted that it was improper to report net sales, because IRS Sec. 6050W(a)(2) specifically stated that gross amounts must be reported. However, the IRS also noted, in the Regulations preamble, that The information reported on the return required under these regulations is not intended to be an exact match of the net, taxable, or even the gross income of a payee. So what that means, in theory, is that your numbers aren’t going to have to be an exact match to the 1099-K, and the difference isn’t going to be an automatic audit flag.
The 1099-K is just one of the many 1099 changes coming your way in 2011! Tomorrow we’ll be talking about the new reporting requirements for goods and services, and for landlords and real estate investors.