Beginning with Jan. 31, 2012, by Jan. 31 of each year, merchants conducting credit card, debit card or gift card transactions may receive a Form 1099-K from the card processing company reporting the gross amount paid to the merchant during the prior year. Payments made through a third-party settlement network, such as PayPal or eBay, will be reported only if the payee receives more than $20,000 in aggregate and the total number of payment transactions exceeds 200.
Form 1099-K is a new form for the 2012 tax year, implemented to ensure that businesses, especially small businesses, pay tax on their credit and debit card income, especially from online sales. Even merchants who already properly report their credit and debit card income are affected by this new requirement because they must establish new accounting procedures. This is because Form 1099-K will report the gross amount received through payment cards, and therefore you must reconcile the form with your own records to take into account fees, returned items, cash back and other similar amounts.
Pay attention to requests for filing W-9 forms from your credit card vendors as the card processing company may be required to institute backup withholding on your credit card transactions if you do not provide them with a correct taxpayer identification number, such as an EIN. The IRS has delayed this requirement until after 2012, however. The IRS also has provided that for payments made to a third party settlement network, backup withholding will not apply to payees who receive fewer than 200 payment transactions, even if they receive more than $20,000 in payments.
