New IRS tax form 1099-K to report sales from credit and debit cards

Starting in January 2012, businesses that accept credit and debit cards when making sales to customers will receive an IRS tax form 1099-K from their credit card processing company. The 1099-K will report the total payment transactions for the year 2011. The new reporting requirement is part of on-going government efforts to increase collection of income tax.

The New Form

The IRS tax form 1099-K was created as part of the Housing and Economic Recovery Act of 2008 to increase compliance in reporting sales income by merchants. Because the IRS also gets a copy of the form, it will help the agency to determine whether or not business owners are reporting correct sales figures on their tax returns. Other legislation affecting reporting requirements was detailed in a May 1, 2011 article for Accounting Today titled, “1099 repeal eases some requirements, but leaves new ones for 2011.”

Regarding 1099-K reporting requirements, authors George G. Jones and Mark A. Luscombe said, “The reporting threshold is an aggregate value of third-party network transactions for a merchant of $20,000 or more for the calendar year and aggregate transactions of 200 or more. This reporting requirement is effective for sales made on or after January 1, 2011. Some taxpayers are also seeking waivers from these requirements.”

Third-Party Networks

Not only must banks and credit card processing companies comply with the new reporting requirement, third-party networks such as PayPal and eBay, Inc. must also report total credit card transactions to their business customers who use their services to process online sales. Compliance may prove to be a major adjustment for these entities. PayPal, a subsidiary of eBay, Inc., generated more than $31 billion in total net payments in 2009, according to eBay’s annual report for that year.

Exceptions

Not every merchant will receive a form 1099-K; only those who generated both a minimum of 200 transactions and $20,000 or more in sales. Casual sellers should keep in mind that even though they may not receive a 1099-K, their sales income is subject to income tax and must be reported on their tax return. Knowing whether your online “garage sale” qualifies as a business in the eyes of the IRS can be tricky. According to writer Tom Herman, even an experienced IRS employee was found to have underreported her eBay earnings. In a May 30, 2010 online Washington Post article titled, “IRS wants a cut of online sales on eBay, Craigslist” Herman said, “As the IRS points out, income from auctions that resemble a garage or yard sale ‘generally’ isn’t required to be reported. But if an online garage sale turns into a business with recurring sales and purchases of items for resale, ‘it may be considered an online auction business.’ And the complexities can be manifold.”

Closing the Gap

According to Jones and Luscombe, the 1099-K filing requirement is just one method being looked at by Congress to close the tax gap — that is, the gap between the tax revenues that the government should be collecting and the actual collections. Another IRS form 1099 that some merchants may receive is the form 1099-MISC which is used to report payments made to independent contractors when total payments for the year are at least $600. In addition to income taxes, independent contractors must also pay their own Social Security and Medicare tax at a combined rate of 15.3 percent of their net self-employment income.

How big is the tax gap? According to a May 11, 2011 article for Reuters Money titled, “Do higher taxes encourage tax avoidance?” the IRS isn’t sure of the exact figure but the amount is significant. According to the article, “the Internal Revenue Service doesn’t have specific figures on the revenue lost each year to tax avoidance, but nearly a decade ago it reported a tax-gap of $345 billion, the vast majority of which was lost to under-reporting. That figure hasn’t been updated since 2001, though the IRS says plans are underway to release more current stats.”

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10 Responses to New IRS tax form 1099-K to report sales from credit and debit cards

  1. Pingback: Irs Tax Online « « Karen Speaks Karen Speaks

  2. jeev says:

    What is the best site that can handle 1099 K and 1099 Misc large volume filing for a fairly affordable price? Did any one use 1099online.com

  3. Claire Moore says:

    Here are companies that do processing of Information Returns (Forms 1042-S, 1098, 1099, 5498, 8027 and W2G)

    http://www.irs.gov/efile/lists/0,,id=100422,00.html

  4. It is in reality a nice and useful piece of information. I am satisfied that you simply shared this helpful information with us. Please keep us up to date like this. Thank you for sharing.

  5. Angelina says:

    Yes i did use 1099online.com for my 1099 misc efile forms and must say I am pretty satisfied with their service.

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  7. Helen says:

    Your comment is awaiting moderation.

    I have a question and would like to know if anyone can help me
    I registered my paypal account in the US when I was studying in Boston a while back and still continue to keep that account since I moved back to hong kong. I am not a US citizen , do have a ssn, but haven’t lived in the US since 2010. but this year actually i got the tax form 1099k from paypal. What am I supposed to do? I kept the paypal account because I have US bank account. Now I am confuse what I am suppose to do. I don’t even how to file tax or if I need to pay tax to the IRS.

  8. Claire Moore says:

    Helen
    I don’t have enough information on your situation to know for sure what you should do.
    It sounds as if you are what we call a non-resident alien. It also sounds as if you were here temporarily as a student.

    Here is a web site from the IRS with information that should help you get started in deciding what to do. You may need to file a form 1040NR for non-resident aliens. You can also get the forms you need at the IRS web site.

    http://www.irs.gov/businesses/small/international/article/0,,id=96477,00.html

    Claire

  9. Dear Helen,

    The form 1099K is an informational return required by processors of payments to tell you that the IRS has information on your business transactions. These transactions are interpreted as sales and you received payment through your Paypal vendor.

    I am speculating that your business transactions exceeded the minimum trigger to generate the form $20,000. I believe the IRS want you to file a tax return for your business indicating in profit or loss. I believe if the account continues to conduct business with no reporting vendors processing tranactions will be required to make backup withholdings at the rate of 30%.

    The specifics to your tax liability in the US can be found in the following publications: Pub 515, Pub 519, Pub, 901, Pub 1187 and Pub 1281. Also, forms 1042, 1042-s and 1040T. I do not believe the IRS has offices in Hong Kong however, Notice 97-40 mentions a treaty exist.

    Good Luck

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