New regulations in the Internal Revenue Code require all merchant acquiring entities to file a new form called a 1099-K with the Internal Revenue Service (IRS) each year.
Since these regulations can be confusing, we’ve compiled a list of common questions to help you understand the ins & outs of the new tax code changes.
What are the new IRS Requirements?
The IRS created a new form called a 1099-K, Merchant Card & Third Party Network Payments. Form 1099-K will report each merchant’s payment card transactions for the calendar year, starting with 2011. Form 1099-K must include the transactions for each Taxpayer Identification Number (TIN), including all merchant accounts associated with that TIN. A copy of Form 1099-K must also be provided to each merchant, starting in January 2012.
The IRS requires a valid business name & TIN for each merchant. If merchant acquirers do not have a valid business name & TIN, the IRS will require acquirers to start backup withholding, at a current rate of 28% of gross sales, beginning in 2012.
When do the IRS requirements take effect?
Reporting for the new Form 1099-K begins for calendar year 2011. The form must be filed with the IRS by 4/2/12 & copies must be sent to merchants by 1/31/12.
The backup withholding requirement begins in January 2012.
What transactions are included on Form 1099-K?
We are required to report “payment card transactions” which have a precise definition in the tax code. The definition includes all credit cards, debit cards & stored-value cards (including gift cards).
Cash advance transactions are exempt from the rules, so acquirers do not have to report (or backup withhold) for bank cash advance branches.
Form 1099-K includes sales data for the full calendar year, plus the subtotal for each month of that year. Specifically, we must report gross sales (not adjusting for credits or returns) by the transaction date (not the settle date).
The IRS rules also specify who needs to report payment card transactions. As a general rule, the acquirer or processor that does the settlement of the transactions – meaning the company that puts the deposit into the merchant’s account – is required to report such transactions on Form 1099-K.
Does Form 1099-K apply to each merchant account or business name?
The IRS requires merchant acquirers to report by each business’ Taxpayer Identification Number (TIN), meaning its Employer Identification Number (EIN) or Social Security Number (SSN). The TIN is associated with the business’ legal name, the name used for its tax return. If a business has more than one merchant account (MID), then the Form 1099-K will combine the activity across multiple accounts.
When are processors required to start backup withholding?
If merchants do not have a valid, matching TIN, the acquirer/processor must withhold the specified amount (currently 28%) until it obtains a valid name & TIN. This begins January 1, 2012. The IRS has specific rules about when acquirers must start & stop withholding for a given merchant, but it essentially begins right away for new merchants. Therefore, it is critical to provide a valid name & TIN for all new merchant applications.
What happens to money that is withheld?
The money is transferred to the IRS. This means that merchants will not have access to this money until they file a tax return the following year & potentially get a refund.