Way back in 2008, when our economy was first melting down, a piece of legislation called The Housing and Economy Recovery Act of 2008 was passed. In it, there was some language that will change the game where Internet sales are concerned – at least if you accept credit cards. Those changes are due to kick in on January 1, 2011.
Basically, any credit card processer that processes debit cards, credit cards, gift cards and electronic payments (i.e., PayPal) for you or your business will now be required by law to report those sales to the IRS on a monthly basis. Once a year, processers must also prepare a form of 1099 (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.
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.
Of course it’s not just Internet sellers who will be affected. This new law will apply to every person or business who processes payment through electronic means, whether over the Internet or over the counter.
Not everyone or every business will be affected. There is a minimum threshold of $20,000, or 200+ transactions. Take in $18,000 in electronic payments? You won’t get a 1099-K. Sell 250 items, that collectively don’t add up to $20,000, and you won’t get a 1099-K either. On the other hand, 4 transactions at $5,000 each will get you a 1099-K. And who knows – depending on the success of the program, the IRS could very easily move those thresholds around.
All ePayments. No Exceptions. The IRS has made it very clear that this reporting requirement will apply to any form of ePayment, and that very definitely includes PayPal.
Good Bookkeeping Will Be Critical. The IRS, in typical fashion, hasn’t finished putting together the regulations on how this will all be reported. It’s likely that your 1099-K is going to contain only your gross sales. It won’t take into account chargebacks, merchant processing fees, cost of goods, etc. 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.
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.
So will this mean a sudden return to cash-only and check payments over the Internet? No, probably not. But it will mean additional scrutiny of your return and possibly your records. If you need assistance with record-keeping or tax preparation, you’ve come to the right place! Drop a line to either Richard@USTaxAid.com or Thomas@USTaxAid.com, to learn more.
To see a larger version of the proposed 1099-K, click this link to the IRS website.