New flash – people sell stuff online! At least this seems to be news to the IRS, which suspects we are not paying income tax on these transactions.
Beginning with the current tax year, the IRS has instituted a requirement that any bank or other payment settlement company (such as Pay Pal, Pro Pay or Square) that processes credit cards, debit cards, and electronic payments such as PayPal will have to issue information returns telling the IRS the amount of the payments they process for merchants. An advance copy of the new return, Form 1099-K, can be viewed here: http://www.irs.gov/pub/irs-dft/f1099k--dft.pdf.
How does this new requirement affect you?
For many, if not most, of us the information will not be reported. There is a reporting exemption for small merchants, so processors are not required to report on any merchant for whom they process less than $20,000. in gross sales AND fewer than 200 sales. Also, there does not appear to be any mechanism for transferring data from one processor to another, so if you had $15,000 and 150 sales on square at events and $15,000 and 150 sales through PayPal online you would apparently fall below the reporting threshold.
Even if the information is reported, the IRS will have a hard time matching the amounts reported by your payment processors with the income you report, since the payment processors report gross payments, before they apply any processing fees. (I’m not advocating tax avoidance, I’m just pointing out some flaws in their process).
However, processors will still have to collect the data. Who knows, you might have a huge December and exceed the reporting exemption.
The first implication of this is that you need to provide a tax ID number. Presumably you have already provided this, but if you are a sole proprietor about to start accepting credit cards and find the idea of sharing your social security number with Square problematic you can get a tax ID number from the IRS here: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html This number is called an “Employer Identification Number”, or EIN, but you are not required to have employees to obtain one.
In addition, Form 1099K data collection and reporting is a big new burden for payment processing companies – note that the form requires them to report the revenue collected on a month by month basis. This implication is that we can expect credit card processing fees to increase. Of course, these are tax-deductible business expenses…which means the IRS may collect less income tax from those of us who have been paying our taxes all along.
Maybe it will create a few jobs….