Effective for the tax year 2011, there are significant changes for businesses that pay vendors via credit card or accept credit card payments. The IRS has created a new 1099-K form to report credit card activity. This new form will impact businesses as follows:
Businesses that pay vendors for services via credit or debit card
For 2011, businesses that pay for services via a credit or debit card and in prior years prepared a Form 1099-MISC for those vendors, the reporting requirement has changed. As normal, you will be preparing 1099-MISC forms for anyone you paid $600 or more to for services rendered, rent paid, etc. There is no change in that requirement EXCEPT – do NOT include any payments made to the vendor by credit card or debit card. The credit card processors will now be reporting these payments on the new 1099-K form and will be responsible to submit to the IRS.
Businesses will only report amounts on Form 1099-MISC that are paid via check or cash. Credit card payments are to be excluded. This may require additional accounting time to segregate these payments for 1099 reporting.
Businesses that receive credit or debit card payments
Businesses that accepted credit and debit card payments for 2011 will receive a Form 1099-K from their merchant card providers. The form will report credit card payments received by your business for the year from your customers. This form will also be submitted to the Internal Revenue Service. All 2011 business income tax returns have been modified to now reflect a line item showing merchant/credit card receipts. The eventual goal for the IRS will be to match the Form 1099-K to your business tax return line item for merchant/credit cards receipts to assure businesses are not underreporting income.
The IRS will not start matching receipts to the business tax returns until the 2012 tax year and will use the Form 1099-K as an audit tool to match income. Businesses that receive 1099-MISC for 2011 should closely review the amounts to assure the form has been submitted correctly and excludes credit card payments. If the 1099 MISC and 1099-K both include credit card payments, the receipts reported to the IRS will be duplicated. In the future, this could create income matching issues with the IRS.
If you have any questions regarding this new reporting issue, please contact us today.