Section 6050W of the IRS tax code came with the Housing Assistance Act of 2008 (although it’s completely unrelated to housing) and introduced us to the 1099-K.
Known as the “Merchant Card and Third Party Network Payments” form, the 1099-K is an IRS effort to increase tax compliance and decrease the “tax gap,” or the difference between what people earn and what they actually report for taxes. It went into action during the 2012 tax season for 2011 income.
Payment settlement entities (PSEs), like us, are required to submit an annual 1099-K to the IRS showing, month by month, exactly how much each of our client merchants earned in electronic sales—credit, debit, stored-value cards and electronic funds transfers—over the fiscal year.
PSEs also send the 1099-K to merchants (by January 31) so that they can use it to properly file their other tax forms.
Before the dawn of the 1099-K, a lot of tax gaps were thought to come from small businesses accepting payments through platforms like eBay, Etsy, Amazon, ridesharing apps and other third-party sites.
Others also managed to fly under the radar with underreported, or completely unreported, sales. The 1099-K allows the IRS to tighten up the accuracy and enforcement of business taxes.
Businesses who bring in less than $20,000/year and have fewer than 200 transactions/year are exempt from the requirement and won’t receive a 1099-K.
1099-K Business Tips
- Make sure you provide your payment processor with the correct Tax Identification Number (TIN), tax filing name and your legal name as the business owner. Also, be sure these match all of the information on your other tax documents. If you provide an incorrect TIN, the IRS may instate backup withholding—taking a hefty 24% of your future earnings until the federal income tax is met. If you do become subject to this backup withholding (you’ll receive what’s called a B Notice warning you of it), you can fix it by providing the correct TIN, amending your return, properly filing any returns that were missing, and paying the owed taxes. Avoid this (literally and figuratively) taxing process by double checking that your business information is up to date and consistent everywhere!
- Provide your payment processor with the correct mailing address to ensure timely receipt of your 1099-K. This is particularly pertinent for ecommerce merchants who may not be tied to a physical location.
- If you switched payment processors at some point during the year, be sure to include 1099-K reporting data from both of them. A business with multiple merchant accounts will need separate 1099-Ks for each. But any businesses, or branches of a business, with the same TIN use the same 1099-K.
- During the year, avoid processing any personal expenses through your business’s electronic payment system. For example, say your friend owes you money and wants to pay you back with a credit card. It might be tempting to use your business’s payment terminal to take the payment. However, that money then becomes part of the 1099-K, and is taxable.
- Your 1099-K shows your gross sales from electronic transactions, and does not include chargebacks or returns, so you’ll have to report adjustments under the Returns and Allowances section of your tax return. The IRS understands discrepancies between tax returns and 1099-Ks, particularly for entities like restaurants, as tips made with payment cards aren’t considered taxable income. But they will investigate large inconsistencies that seem suspicious by asking for more documentation to account for the differences, so it’s important to keep all of your transaction records handy.
1099-K requirements can either be a pain or a breeze you barely notice. To keep it the latter, the main things to remember are to keep your TIN up to date with your payment processor, file your taxes honestly, and, when in doubt, bring questions to your payment processor to avoid problems down the road.