The 1099 Credit Card Payment Exception


This post is in: Business
5 Comments

11-25-2010-1

We’ve been talking about changes to 1099 reporting this week. Monday we covered the new 1099-K requirements that your merchant processers need to follow. Tuesday we talked about the new 1099-MISC procedures that business owners and landlords/property owners have to adopt beginning in January, 2011.

And now, to confuse things a little further, we’re going to talk about when these new 1099-MISC requirements don’t apply.

The IRS is well aware that the changes to 1099-MISC mean an awful lot of new record-keeping for business and property owners. In theory, you could be sending a 1099 to Office Depot, if you buy more than $600 worth of office supplies in a year. That effect is going to be multiplied by millions, as everyone from 1-person shops to 1,000+ employee businesses try to get in sync with the new rules.

So, having said that, the IRS and taxpayer advocate groups have been working together to try and find some ways to mitigate all the extra work.

One suggestion, which has been accepted by the IRS, is to do away with double-reporting, where credit cards are used to make a payment.

Remember, all credit card processers and 3rd party payment processors (like PayPal) will be tracking all sales, beginning next year. If one of their customers hits the 200 transactions + $20,000 gross sales mark, the merchant processor will also report those sales to the IRS and will send the customer a 1099-K. A company like Office Depot is likely going to hit the 200/$20,000 mark on January 1st.

So, rather than make both you and the merchant card processors report the same piece of information about your purchases from Office Depot, the IRS regulations have specifically stated that you won’t need to track purchases and send out 1099s if you use a credit card to pay for those purchases.

It sounds good on the surface, but we’ve still got some questions. For example, how will you know if the service provider or merchant you pay will hit the $20k/200 transaction threshold and get a 1099-K from their merchant service provider? Can you count on the credit card exemption to get you out of 1099 requirements? Or, are you better served by hoping for the best, and planning for the opposite, getting W-9s from all vendors and service providers, and tracking that information anyways?

There are no guaranteed answers just yet, but 2011 is certainly shaping up to be an busy year for tax-planning and record keeping.



5 Comments

  1. wayside says:

    How can the IRS possibly reconcile the double-counting? If I 1099 someone just to cover my butt because I don’t know if they meet the $20K/200 threshold, and they also get a 1099 from the CC processor… then what?

    • Megan Hughes says:

      Wayside, good question! Unless there’s a full blanket ruling – i.e., under no circumstances do you issue a 1099 if you paid someone by credit card – there’s going to be confusion.

      All we can do at this point is keep good records and see how the year progresses. I don’t think getting W9s is going to be difficult from most companies. Heck, I’d be surprised if we didn’t start seeing EINs printed on receipts, etc., and W9s available for download on most corporate websites.

  2. Megan Hughes says:

    Hi Wayside,

    That’s the theory … but as with anything new, proceed with caution. Big outfits like Home Depot are pretty straightforward. They’re going to hit the $20,000/200 threshold without question. You’re probably going to be just fine not issuing them a 1099.

    But when you’re dealing with other small businesses, who may not make that $20k/200 threshold, I don’t know if you can depend on the credit card loophole.

    I’m also not convinced we’re finished with this subject, and I suspect we’ll see more changes coming in the next few months.

  3. wayside says:

    So – if I only pay Home Depot with a credit card, I don’t have to send them a 1099? This sounds pretty good, I pay almost everything with a credit card.

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