Beginning in January 2012, companies that process credit and debit card transactions (banks, PayPal, Google Checkout and other merchant card services) will be sending out a new information return. The new Form 1099-K will report the money merchants received through that payment processing company for all of 2011. This is becoming known in ecommerce circles as the PayPal 1099.
In a nutshell, the 1099 from PayPal and other merchants will report – straight to the government – how much revenue you made through that payment processor. You read that right. This means the government will already know how much you made! But what they won’t automatically know is how much you spent to keep your business running. This is why it is now more vital than ever for ecommerce sellers and other online businesses who rely on PayPal to record every single business expense, from shipping to COGS, and then fill out a detailed tax return at the end of the year. If you are woefully behind already in 2011, sign up for Outright.com to get started importing all your financial accounts (including PayPal) and start getting a handle on your expenses before Uncle Sam thinks you owe him an exorbitant amount in taxes!
The most recent estimates are that close to 80% of the US population now has a credit or debit card. Mastercard and Visa combined have over 520 million cards in circulation and processed $1.7 trillion dollars in transactions in 2010. Recognizing that a large percentage of business is now transacted through credit and debit cards, the government added information reporting of those transactions in the 2008 Housing and Economic Recovery Act. If you are a merchant who accepts payment by credit or debit card, here are some important questions and related action steps you may need to take.
- Who will issue the 1099-K? Credit card processors will issue the new forms not you the individual business owner. The company that processes your credit card receipts will likely ask for your tax id number. Sole proprietors that are uncomfortable giving out their social security number, may want to obtain a EIN from the IRS.
- Do I have to provide my tax id number to the credit card company? If you do not, the credit card company could be required to start withholding 30% of your payments in tax withholding.
- Will I receive a 1099-K? Not every merchant will receive a 1099K. Only those merchants who receive over $20,000 and over 200 credit/debit transactions will receive a 1099-K. The $20,000 is calculated by looking at your gross sales volume.
- What will be reported? Along with your name, address and tax id number, the 1099-K will report your gross receipts that were processed by the credit card company. If you have been reporting PayPal revenue subtracting your PayPal fees, you probably want to change and record your gross receipts and deduct the merchant fees as an expense.
- Will the IRS see every credit card transaction? No, only the gross amount of credit card transactions processed will be reported.
- Will the 1099-K replace the 1099-Misc forms I receive and those I have to fill out every year? No the 1099-K is an additional information return and does not change the existing 1099-Misc forms. You do want to be careful at year end to insure you don’t duplicate revenue that may be reported to you on both 1099-K and 1099-Misc forms.
- If I have multiple accounts, do they count together? Yes, if they all have the same SSN/TIN/EIN number. If combined they total 200 transactions and $20,000 you qualify for the 1099.
Don’t stress too much over the new 1099-K form. It is really just an extension of the other information returns you already receive every year. Just be sure to check the information on the form to insure you have properly recorded all of the credit card receipts your business receives. For everything you ever possibly wanted to know about the PayPal 1099, check out our PayPal 1099-K Tax Resource Center!
