IRS Reporting for Merchant Accounts: 1099-K’s

IRS Reporting for Merchant Accounts: 1099-K’s

The IRS has recently instituted changes to the way your merchant account payment processor is required to report credit card and third party payment transactions on your account. These changes took effect beginning in the 2011 fiscal year, and affect businesses that accept payment cards (including credit or debit cards, and prepaid cards or gift cards) or third party network transactions such as PayPal, as payment for goods or services.

Your merchant account processor is required to use the new IRS Form 1099-K to report the gross payment amounts of all reportable transactions for the calendar year for each business they serve. Form 1099-K also breaks down these transactions by the month, to help ensure accuracy and reconcile differences between the information returns and tax returns. Any fees, returns, chargebacks, credits, and discounts are excluded from the reported transactions, which could result in discrepancies in the 1099-K report, so it is important for your business to keep careful transaction records. You should receive a copy of your 1099-K form shortly after the close of the calendar year so that you may review the form and information therein and address any inconsistencies you find.

Another important modification to the previous regulation closes a loophole that used to allow the merchant account to be held under a different name than the business itself. In the past, it was possible for a business owner to open a merchant account under the name of a spouse or child in order to avoid reporting tax on processing. The new regulations require merchant account processors to report the legal business name, legal address, and Taxpayer Identification Number (either your Social Security Number or your Employer Identification Number) on your account to the IRS along with your business’s annual and monthly gross payment card transactions. This information must match the identifying details for your business held by the Internal Revenue Service.

If the identification information reported by your payment processor on your 1099-K form does not match your information on file with the IRS, the payment processing company may be required to withhold a fixed percentage of your reported payment as backup withholding. Through December 31st, 2012, the percentage required for backup withholding is 28 percent of reported payments; after that date, the rate of backup withholding has not been determined and may change. While you will receive credit for the withholding when you file your tax return, the withholding will not end until such time as the discrepancy in your identification information is resolved. You will also have to wait until your tax return is filed in order to receive the remainder of your withheld funds, if the withholding was in excess of the amount you owe the IRS.

Transactions in which you or your business use a payment card or third party payment network to make purchases for your business, to obtain cash advances or loans, or to withdraw funds from an ATM, are not affected by these regulations. Your business is only affected by 1099-K reporting if the gross value of payment card and third party transactions equals or exceeds $20,000 for the calendar year, and/or if your business receives at least 200 total transactions of this type over the calendar year. If your business receives a sufficient volume of reportable payment card transactions to be affected by these changes in policy, it is important that you keep careful records of your transactions in order to ensure the accuracy of your 1099-K reporting, and verify that the Taxpayer Identification Number and other identifying information you gave your merchant account payment processor matches the information held by the IRS.

You can find many more answers to your questions on the IRS website: General FAQs on Payment Card and Third Party Network Transactions.

If you have any questions regarding 1099-K’s, or are tired of your current merchant account providers inability to answer your questions in a timely manner (forcing you to google questions!) please contact for a free quote!

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