Thursday, February 16, 2012

New Reporting Requirements for Credit Card and Third Party Network Payments - Part 2

Merchant card and third party network payers, as “payment settlement entities” (PSEs) are now required to report to IRS
proceeds of payment card and third party network transactions (PC/TPN transactions) on Form 1099-K. Part 1 of this Fax
Alert outlined some challenges for companies which will now be required to segregate these payments on their tax
returns. Below is more information related to 1099-K and the new business reporting requirements.

1. Debit card transactions, cash advances, convenience checks and payments to related parties are not included in the
definition of “payment card” transactions and are therefore excluded from 1099-K reporting.
2. IRS has determined that transactions reported on Form 1099-K are not to also be reported on Form 1099-MISC, if
applicable. For example, credit card payments to an individual subcontractor would not be included on a 1099-MISC
issued by the payer. Such payments should be reported to IRS via Form 1099-K issued from the PSE that handled
the payment. Payments by check or cash are still reported on Form 1099-MISC. Companies or individuals receiving
Form(s) 1099-K should verify that payments received by PC/TPN are not duplicated on Form(s) 1099-MISC.
3. Form 1099-K includes PC/TPN transactions by month to accommodate fiscal year businesses. Since Forms 1099-K are issued for calendar years (due to payees by January 31st of the following year), the PC/TPN transactions fiscal year businesses will report on their tax returns will be reported to IRS on two years' Forms 1099-K.  Many fiscal  year businesses will not have the luxury of matching their records to Forms1099-K prior to filing their tax returns. making good record-keeping paramount. 
4. Credit card charges will be included in the gross amount reported on Form 1099-K even if the PSE remits funds net of
its fee.
5. There is an exception for de minimis third party network payments. Third party network payments are required to be
reported on Form 1099-K only if i) payments exceed $20,000, or ii) the aggregate number of TPN transactions
exceeds 200. However, TPN transactions no matter what size or number are still required to be segregated (with
payment card transactions) on business tax returns beginning with 2012 returns.
6. There is no de minimis exception for payment card transactions; all such transactions are to be reported both on
Form 1099-K and segregated on business tax returns starting with 2012.
7. Business income tax returns affected by the new reporting rules include Forms 1120, 1120S, 1065, 1040 Schedules C,
E, and F.
8. It does not appear that non-profit organizations will have reporting requirements regarding PC/TPN transactions,
although non-profits will receive Forms 1099-K if they engage in qualifying transactions.
9. Backup withholding, where 28% of any payment is withheld and remitted to IRS as federal income tax withholding,
will apply after December 31, 2012 if a taxpayer does not furnish its TIN (taxpayer identification number) to a PSE.

Recently IRS has admitted that it won’t likely be matching Form 1099-K amounts to tax returns for some time. Also, there are legislative stirrings to prohibit IRS from fully implementing Form 1099-K because of the excessive burden to small businesses. Stay tuned for any further developments.

Contact us at (219) 769-3616 or e-mail your questions to

Thursday, February 2, 2012

New Reporting Requirements for Credit Card and Third Party Network Payments - Part 1

Congress required, as part of the Housing and Economic Recovery Act of 2008, the matching of income from sales paid with credit cards or through third party networks (TPNs – Paypal, etc.) with income reported on a tax return. This requirement was an effort to reduce the tax gap, the difference between tax due and tax paid.

The result is a system that will allow IRS to match credit card and TPN receipts to a tax return. A new information report, Form 1099-K, and a new income line on business tax returns, “Merchant card and third party payments” have been created to help IRS in its efforts. Businesses which receive credit card and TPN payments will receive Forms 1099-K from each merchant or network and will report these payments – whether or not a 1099-K is received – on their 2012 tax returns.

As could be anticipated with an undertaking of this magnitude, there are wrinkles. For taxpayers whose credit card and TPN receipts do not include sales tax, employee tips, or other non-income amounts, the reporting should be straightforward, as amounts captured on Form 1099-K should already be included in taxable income. However, taxpayers, whose credit card receipts include sales tax, employee tips, or other non-income amounts, will need to track non-income amounts collected throughout the year to adjust out of income.

Although Forms 1099-K will be sent out for 2011, IRS has delayed the business tax return reporting requirements to 2012 returns.

This means that calendar year taxpayers with credit card and/or TPN sales need to consider how they will gather the information for reporting such transactions beginning January 1, 2012. It is important that taxpayers track credit card and TPN payments to be able to identify gross credit card payments and adjustments (sales tax, employee tips, etc.) for 2012 reporting.

Gross credit card collections should be reported in their own separate general ledger account.  Taxpayers, whose credit card receipts include sales tax, employee tips, or other non-income amounts, will need to be able to separate or identify these reconciling items on a monthly basis from the credit card collections received.

Contact us at (219) 769-3616 or e-mail your questions to