Your Payments. Your Language.
If you accept card payments, which you most likely do, then you know you must file a Form 1099-K to the IRS; but what you may not realize is that your payment processor can actually assist you with this confusing document, as well as other mandatory tax forms. Conversely, if you have a sloppy processor, you may find yourself in a world of hurt with the federal government…read on to learn why.
The Payment Card and Third Party Network Transactions 1099-K Form and You
Form 1099-K, the “Payment Card and Third Party Network Transactions” form, is a federal tax informational return introduced in January 0f 2012. Though businesses have been filing this form for four years now, it is still a confusing document to many merchants.
A participating payee, according to the IRS is “any person who accepts a payment card as payment, or any person who accepts payment made by a third party settlement organization on behalf of the purchaser or customer.” Basically, that means if you or your business earn revenue processed through a merchant service company, then that income must be reported to the IRS.
You May Face Harsh, New Penalties if Your Processor Messes Up
If you had more than 200 total transactions exceeding $20,000 paid through an electronic payment service in a calendar year, then your payment processor is responsible for sending you your 1099-K. However, they are only required to report your total gross sales, and a careless processor could report your total gross sales incorrectly. The "gross amount" is the total unadjusted dollar amount of the payment transactions which is not adjusted to account for any fees, refunds, or other amounts.
If the information on the 1099-K is incorrect, then the IRS may send you, not your processor, a letter of “Notification of Possible Income Underreporting” which could later result in a pre-audit or formal business audit and assessment for underreported income, as stated by entrepreneur.com.
Furthermore, under IRS 6050W, your processor must verify that their files reflect the correct Tax Filing Name and Taxpayer Identification Number (TIN, which might be your SSN) for your business. This means that the IRS strictly expects the information your processor submits on your 1099-K to be accurate and matches what the IRS has on file for your business.
Unfortunately, even a simple error like a name misspelling can invalidate your 1099-K. If this occurs, the IRS will actually contact your processor and inform them to hold the merchant funds until the information on the 1099-K is corrected. This cannot be emphasized enough: THE IRS WILL ORDER YOUR PROCESSOR TO WITHOLD A PERCENTAGE OF YOUR BUSINESS CARD SALES FOR AN UNDETERMINED AMOUNT OF TIME. Your processor must withhold a flat 28% rate until corrections are made, as stated by the IRS. Prevention of 1099-K and other tax document errors, therefore, is obviously the best method.
How Your Processor can Help You with Your 1099-K and Other Tax Forms
It is vital to you and your business to submit timely and accurate tax information. That may sound simple enough, but every year businesses all across the country receive notices from the IRS. To err on the side of caution, you should match the gross amount your processor reported on your 1099-K with your own merchant financial records. Do not hesitate to contact and work with your processor prior to tax filing time; any processor worth their salt will be more than happy to inform and help you, and if they do not, then that is your sign that your business would be better off in the hands of a competent merchant service provider.
Your processor should verify your correct TIN, legal name, and other necessary IRS business tax record information for accuracy. Correct information is key to preventing future IRS backup withholding on payment card and third-party network transaction gross amount receipts. In fact, much of this information, such as your TIN and legal name, is important for you small business tax filing in general, which can include income tax, estimated taxes, self-employment tax, employment taxes, and excise tax forms, depending on your type of business.
Furthermore, many reputable merchant service providers actually offer monthly, quarterly, or annual sales transaction reports that can simplify business tax filing and avoid common merchant tax problems. While it may be too late for this tax season, there is definitely time to implement such solutions for the remaining 2015 business year and reap the benefits for next year’s tax season. Work with your credit card processor to find out the best solutions available for your business.