1099-K Don’t Let It Catch You Off-Guard
Don’t be surprised if you find a new tax form taking up space in your mailbox in the next couple weeks. Beginning with calendar year 2011 credit card companies and electronic payment processors are required to prepare and file transaction reports with the IRS which list the total payment amounts made to businesses and individuals. That means all transactions handled in this manner will appear on the new Form 1099-K. It will be received along with other tax reporting forms sometime in late January and early February 2012.
The idea of this law was to “improve voluntary tax compliance by businesses and sole proprietors.” That’s another way of saying that the IRS has found a way to force people to report income that has been previously unreported because it was never subject to reporting under the existing rules for 1099 forms. The 1099-K is an effort to bring a halt to what the IRS believes is an underground and untaxed economy consisting of those who transact business on eBay, Etsy, and other similar online retailers.
So how does it really affect you? If you accepted merchant cards for payments (credit cards or gift cards) or if you received payments through a third party network (PayPal) then you may be receiving a 1099-K. The threshold for receiving a 1099-K is total payments in excess of $20,000 or more than 200 transactions. The 1099-K will show the total amount of payments received for the year as well as a breakdown by month.
All income received is subject to reporting on your tax return, not just income reported on a 1099. It is important to review those 1099s and be sure they are correct so the IRS is not expecting higher numbers on your tax returns. Beginning in 2012, payments reported on a 1099-K must be identified on a separate line of your income tax return. Although, you will be receiving a 1099-K in 2011, the separate reporting of these transactions will not take place until 2012. We suggest that you set up new income accounts to separate payments received by way of credit card or third party service from payments received directly from customers by way of cash or check. It will make the reconciliation to the 1099-Ks received much easier.
Katie Sterling – is a Tax Manager at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.