Credit Card Reporting for Tax Purposes Debuts This Month

Article originally published on Forbes.com by Kelly Phillips Erb - 01/13//2012

 

Form W-2, check.
Form 1099-Misc, check.
Form 1098, check.
Form 1099-K… wait, what?

Yep, there’s a new form from the IRS out this year and one might be landing in your mailbox soon. The federal form 1099-K, Merchant Card and Third Party Network Payments, will debut early this year:  forms 1099-K are due to merchants by January 31, 2012. Electronically filed 1099-Ks are due to the IRS April 2, 2012 (normally March 31), while paper 1099-Ks are due February 28, 2012.

So what is the new form 1099-K? It looks like this (downloads as a pdf and yep, no longer in draft form!).

And here’s how it will work: certain payments for goods and services paid by credit card or third party merchants will be reported to the IRS via the form 1099-K. A reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.

In plain talk, this means that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and etsy sellers, affiliates, eBay merchants and other small businesses who accept credit cards, debit card or PayPal as payment for their wares.

But not every dollar will count. Reporting is only required when gross payments to an individual payee exceed $20,000 for the year and when there are more than 200 transactions with the participating payee. So the occasional sale of a crocheted toilet paper roll cover over the internet? Not likely to merit the issuance of a 1099-K. But a successful online store? That’s another story.

It’s the first year of reporting so there’s bound to be a lot of confusion. As a result, the IRS will delay penalty provisions and withholding requirements until January 1, 2013, for entities required to issue the forms 1099-K. The reporting, however, is moving forward.

The point of the law is to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Read: the IRS thinks you’re cheating. And some of you are. That explains the whole tax gap problem. This is yet another effort to step up compliance. Taxpayers who receive those forms 1099-K are going to be expected to report the income. Don’t get caught off guard.

Article originally published on Forbes.com by Kelly Phillips Erb - 01/13//2012