Actually Reporting 1099K Income

The new credit card reporting requirements have been in the news lately. But in case you missed it, here’s a short review. The Housing Assistance Tax Act of 2008 requires the companies that process credit card to issue a 1099K to the businesses they pay. For example, I take credit and debit cards from clients to pay for tax returns. I scan their card and the company approves the payment which appears in my business bank account a few days later. At the beginning of the year, I may receive a 1099K from the processing company. My annual charges are less than the $20,000 /200 transactions requirement so I may not receive a 1099K. CHANGE - This minimum only applies to third party payers like PayPal. Merchant card processers will issue 1099Ks for any charges or debits. Thanks to John for the catch.

These procedures were developed to help cut the Tax Gap. (Taxes not paid on business income that isn’t reported are a major contributor to the Tax Gap.) The major target was people who have income from eBay and other online stores which is seldom reported. If a bricks and mortar business is not reporting all their income, I would suggest it’s their cash receipts that are not reported  not payments that go through their bank account.

If I do receive the 1099K, I will have to report that info on the new line 1a on my Schedule C. (The Schedules C, F, and E have been revised to include 1099K reporting.) However, I will have to subtract the 1099K amount from my gross receipts first so that I don’t double report income. If I don’t get a 1099K, I’ll just report that income with my cash and check income as always. And while the IRS added lines for the credit/debit income, they haven’t added lines for the deductions from the credit/debit income. Huh!

I want Line 1a on my Schedule C to match what was reported to the IRS on the 1099K but that income might not all belong to me. If I ran a restaurant, part of that payment may have included a server tip and it definitely included sales tax. That is not taxable to me. I could actually have credit card sales for food and drinks of $37,000 but receive a 1099K for $45,000. I need to take as an expense deduction on my Schedule C the sales tax and tips that I passed through to others. This may also mean a bookkeeping change on my part to track these deductions. For 2011, some businesses will have to recreate these deductions from their current records. Besides tips and sales taxes, business might also allow cash back or a charity contribution to be added to a credit/debit charge. These will also need to be deducted.

Farmers may not have to worry about tips but they actually have to break out their 1099K income on 2 different lines. One line is for resold animals and the other is for the raised items. And they might have to change the way they track settlement charges and sales tax too.

From what I understand, the IRS will be giving us some guidelines. However, we business owners need to understand that the 1099K may give rise to special deductions to keep from paying too much in taxes.

Comments

[Cindy Galford]

Are the dates for the 1099K to be sent out the same as the 1099misc? I haven't seen dates on them and am concerned about my farm clients that will be receiving them and have to be filed by March 1.

[Trish]

I haven't seen anything that gives them a later target date. But the IRS has given filing reprieves to brokers so I won't rule anything out.

[John]

You WILL get the 1099K, even if you received less than $20,000/200 transactions. That exclusion is for 3rd party processors like Paypay. Please correct that mistake in your article.

[Trish]

Has been changed, thanks for the catch.

[Sandy]

I do not see any supporting data from the IRS.gov website that the $20,000/200 threshold applies only to 3rd party processors. Please provide if anyone knows where that is outlined.
Also - Schedule C instructions for 2011 say you do not have to use line 1a this year - to enter -0-.

[Trish]

The IRS FAQs for 1099Ks, under general FAQs.
Does the de minimis standard apply to payment card transactions?

No, the de minimis standard does not apply to payment card transactions; the de minimis standard applies only to the payment settled by third-party settlement organizations.

Also may not be required to put 1099K info on Schedules but I want clients to get use to bringing it in and if I have it I'll use the line. That's my personal decision.