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 dvanprooyen@swartz-retson.com.

SWARTZ, RETSON & CO., P.C.