If your small business uses a merchant account or accounts to process payments, you’ll likely be getting a new tax form in 2011. It’s called the 1099-K, and it is designed to allow the IRS to keep a record of all payments processed for your business by a third party processor or third party settlement organization.
A third party processor is any company that processes payments on your behalf such as a credit card merchant account provider. A third party settlement organization is a company that you contract with to collect funds on your behalf and then transfer them to your bank account, such as an ACH merchant account provider, an online market place like Amazon, or a general payment processor like PayPal. It does not include service providers that integrate with payment processors such as Authorize.net or PaySimple. It also does not include ACH transactions initiated by your customer (such as using their bank’s online payment system), or your own direct use of online banking (such as scanning a paper check on your smart phone to deposit it with your bank).
Your credit card merchant account provider is required to file a form 1099-K for your business regardless of the volume or amount of transactions you process. Third party settlemtent organizations are only requried to file a form 1099-K for your business if you process more than $20,000 in transactions per year, and over 200 transactions total—even if your business is a non-profit. Note that these minimums are PER PROCESSOR, not your total transactions. For example, if you have an ACH merchant account through which you process 100 transactions for a total of $10,000 and a credit card merchant account through which you process 150 transactions for a total of $15,000 you will recieve a 1099-K from the credit card processor but not the ACH provider. If you process 200 $100 transactions via PayPal you will receive a 1099-K from PayPal. If you process 100 $5 transactions via PayPal and 100 $5 transactions via Google Checkout, you will not receive a 1099-K from either provider. The 1099-K form can be delivered electronically if you provide that permission. It must also be accompanied by a statement breaking down your transactions by month.
The good news is that if you do get a 1099-K this year, it won’t make any difference to the amount of tax you owe. You’ll simply need to report the value of these transactions on your corporate income tax form, just as you ordinarily would all sales revenue. You’ll need to subtract fees and returns as well as cost of goods sold and other applicable expenses to come up with your net income, just as you always would. The new reporting simply gives the government a way to check that you are reporting accurately—though of course, the new forms won’t provide a complete picture as in most cases your entire gross income does not come from payments processed via a third party payment processors.
One key thing to note is that starting in 2013, your business will be subject to back-up withholding of 28% of the gross amount processed if the processor does not have a TIN (Tax identification number—which is your social security number if you’re a sole proprietor, or an Employer Identification Number (EIN).) on file for your business and/or if the business name and address on file with the payment processor does not match the one the IRS has in its database. So, now is a great time to double check that all your merchant account providers have accurate information for your company.
The following resources provide more information about form 1099-K:
- View a copy of the actual 1099-K form
- Read the official IRS 1099-K instructions
- View the IRS FAQs on New Payment Card Reporting Requirements
- View the VISA Northeast Acquirers Association very detailed presentation about 1099-K requirements
- For help with all aspects of small business taxes, go to the IRS Small Business Tax Center