If you are the sole proprietor of a business and you file Schedule C with your federal income tax return, you will notice a new line on the schedule starting in 2011. In Part I, line 1a is for “Merchant card and third party payments”. It also indicates that you should enter -0- for 2011.
The new line is for reporting receipts from credit and debit cards and payments through third party networks such as PayPal. The IRS has delayed the implementation of this reporting requirement, so for 2011 all gross receipts should be reported on line 1b of Schedule C.
If you accepted credit or debit card payments or payments through a third party network and the total was more $20,000 with more than 200 transactions for the year, you should receive Form 1099-K, Merchant Card and Third Party Network Payments. This is a new form for 2011. The payers, including credit and debit card processing companies and third party payment networks, are required to report these payments to you and the IRS on this form.
According to the IRS, if you receive a Form 1099-K for 2011, you should include this amount on line 1b instead of the new line 1a.
As indicated in an article on the Gaebler, Resources for Entrepreneurs website, the intent of this new form and reporting requirement is to improve tax compliance by businesses. It provides the IRS with more visible information to scrutinize tax returns and ensure that all income is reported.
Two other new lines on Schedule C for 2011 are lines I and J. These lines are for you to indicate whether you made any payments that require you to file Forms 1099 and whether you filed the forms. This is also intended to strengthen information reporting.
The new reporting requirements for credit and debit card processing companies and third party payment networks also include a backup withholding requirement. According to the IRS, backup tax withholding will be required if you do not provide the payment card processing company or third party payment network with a correct taxpayer identification number.
This backup withholding requirement was originally scheduled to go into effect for payments made after December 31, 2011, but has been delayed for one year. So you should be sure that your credit and debit card processing company and third party payment network have your correct taxpayer identification number.
Once the reporting requirements are in effect it will also be necessary to reconcile the receipts you record on your books to the amounts reported on Form 1099-K. According to the IRS, the amounts reported on Form 1099-K will be gross receipts, without regard to any credits, charge-backs, fees, discounts, or refunds.
Sources:
FAQs on New Payment Card Reporting Requirements, IRS
Form 1099-K, Merchant Card and Third Party Network Payments
Instructions for Form 1099-K, IRS
Instructions for Schedule C, Profit or Loss from Business
IRS Form 1099-K, Gaebler
Notice 2011-88, IRS
Schedule C, Profit or Loss from Business
Reference:
- A Guide to Information Returns: www.irs.gov/efile/article/0,,id=98114,00.html
- Publication 334, Tax Guide for Small Business: www.irs.gov/pub/irs-pdf/p334.pdf
- Small Business and Self-Employed Tax Center: www.irs.gov/businesses/small/index.html
