Client Alert!

New Reporting Requirement For Form 1099-K For Bank

And Merchant Service Transactions

If your business accepts credit cards for customer payments, receives over $20,000 from a bank or other payment settlement service agent and has more than 200 credit card transactions during the 2011 calendar year, your business will be the recipient of a new IRS Form 1099-K, Merchant Card and Third Party Network Payments for 2011.  In accordance new IRS rules and changes to IRS tax return forms, your business will be required to report the gross income amount from this new Form 1099-K   on a separate line on its particular income tax return (Form 1040, Schedule C, Form 1065, Form 1120 and Form 1120S) and will presumably be required to reconcile this Form 1099-K to your books and records.

The good news is the IRS has already delayed the implementation of this reporting requirement until 2012. The bad news is we are already into the second month of 2012 and you have not made the necessary changes to your books and records in order to reconcile this new Form 1099-K to your customer receipts paid by credit card in 2012!

If your business is subject to these new income reporting and matching requirements, we urge you to begin to review your current system for reporting and reconciling credit card receipts and take the steps necessary to accommodate this new reporting requirement. One suggestion would be to use 2011 as a test period and begin to reconcile 2011 credit card transactions in order to identify any reconciling differences. We also recommend the following be taken into consideration:

• The amounts reported are gross monthly and annual payments. Any fees, charge backs, refunds and other items will not be netted against these gross amounts for IRS reporting purposes.  So if you are currently recording only a net deposit from a merchant account, you will need to segregate the gross receipt and other offsetting amounts such as fees and refunds.
• The same “gross” versus “net” issue can be caused by transactions that are subject to sales tax. Just separating gross credit card sales may not be enough if credit card receipts also include sales tax.
• Cash basis taxpayers will have an easier time separating credit card receipts from other receipts. Accrual basis taxpayers who utilize accounts receivable systems may encounter an additional layer of complexity, especially when the payment of the receivable can be by either check or credit card.
• If you are doing business with several merchant service processors, your reporting system will need to separate credit card receipts by processors in order to reconcile gross credit card receipts to each Form 1099-K received.
• If your business pays some of its service provider vendors by credit card, your business should not include any credit card payment in any Form 1099-MISC issued to such vendor. The bank or merchant service agent may issue this vendor a Form 1099-K and such payment inclusion in Form 1099-MISC could result in a duplicate reported item.

Your Harvey & Horowitz contact can assist you with any questions relative to Form 1099-K and other related issues.  Just call your contact or ask to speak to any of our partners.