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IRS to Track Online Sellers' Payment Transactions - 1/1/2011

Discussion in 'The Okie Corral' started by Dalton Wayne, Mar 8, 2010.

  1. Dalton Wayne

    Dalton Wayne Epic mustache Millennium Member

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    Internet sellers who don't report their sales will no longer be under the radar. Starting next year, any bank or other payment settlement company that processes credit cards, debit cards, and electronic payments such as PayPal will have to issue information returns telling the IRS what merchants receive. The new returns are Form 1099-K, Merchant Card and Third-Party Payments.

    Purpose of Reporting
    The IRS believes that many online sellers fail to report their transactions. Some don't report because they mistakenly believe that Internet sales are invisible. Others do so because they are trying to evade taxes.

    The IRS has found that using information returns, such as W-2 forms for employees, Form 1099-MISC for independent contractors, and Form 1099-INT for bank interest, goes a long way toward improving the reporting of income. IRS computers can match income reported on these information returns with the income reported on tax returns.

    Who's Subject to Reporting
    All merchants who accept payments through credit cards, debit cards, gift cards and PayPal will receive information returns telling them - and the IRS - the gross amount of the merchant card transactions. This will be broken down month by month. While the form uses the word "card," the IRS has made it clear that this is interpreted broadly to include third-party network transactions (i.e., PayPal).

    Exception: Very small merchants won't be issued information returns. "Small" for this purpose means annual gross sales on merchant cards of no more than $20,000 or 200 or fewer transactions. In other words, reporting is required only if gross amounts for the year exceed $20,000 and there are more than 200 transactions.

    Mechanics
    As it now stands (proposed regulations have not yet been finalized), gross amounts reported for merchant transactions do not take into account any adjustments for credits, cash equivalents, discount amounts, fees, chargebacks, refunded amounts, or any other amounts. It will be up to sellers to report on their returns the full amounts reported to them and then make adjustments or explanations to account for differences in what is ultimately taxable to them.

    For example, a seller who is paid $1,000 by credit card for a particular transaction does not necessarily have $1,000 profit even though $1,000 will be included on Form 1099-K. The $1,000 must be reported so the return will match what's in the IRS computers, but this amount will then be reduced on the merchant's return by the cost of goods sold (what it costs for the inventory sold), merchant account fees, and other costs.

    Providing Your Tax ID Number to Processors
    Merchants will have to provide their federal tax identification numbers to the companies processing their transactions. If they fail to do so, they may become subject to "backup withholding," which means these companies will have to deduct and withhold income tax from reportable payments. Backup withholding won't go into effect until 2012.

    Sellers who don't wish to provide their social security number to payment processors can obtain an EIN (Employer ID Number). Note that you can obtain an EIN even if you are a sole proprietorship. See the IRS website for more information.

    More information on Form 1099-K
    You can find more information about Form 1099-K, the new information return that payment settlement entities will use to report the gross amount of merchant card or third-party payments, on this IRS web page (PDF format).

    See also, "What Every Merchant Should Know about New IRS Reporting Requirements" from this May 2009 EcommerceBytes article.
    Regards
    DW
     
  2. staedtler

    staedtler

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    I appreciate that the OP is quoting a source but I'd be very surprised if the legislation is actually framed in these exact terms - it seems to suggest that there is no limit to the unreportable dollar amount if it is accrued in no more than 200 trx. Similarly, one could sell 19,999 items for a dollar and not be required to report the income. I don't live in the USA but if this was our erstwhile UK Inland Revenue Service, I would expect it to be "£20,000 or there are more than 200 transactions.". Maybe your tax authorities are nicer guys :).
     

  3. Mnukedude

    Mnukedude Lurking

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    Does this mean that the government will now track what we buy online?
     
  4. cowboy1964

    cowboy1964

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    Last edited: May 21, 2010
  5. hi480volts

    hi480volts

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    I guess it is easier to keep track of us than to collect income taxes from illegals?
     
  6. Deployment Solu

    Deployment Solu Kydex Crafter

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    BINGO!!!! Fruit of the low hanging tree is easier to harvest than picking what you should!!!!!
     
  7. speedsix

    speedsix

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    I am very worried about this. This is a bad sign of things to come. I don't overreact to stuff like this but this is bad news for a lot of small businesses and people trying to make a few extra bucks on the side. Just having to deal with the paperwork will force some small businesses to avoid online transactions.

    I know Paypal will rat any and everyone out.
     
  8. CigarGuy

    CigarGuy

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    There is a LOT more of this crap coming. Right now, if your business uses a service and pays over $600 a year AND that business is a corporation, you don't have to give them a 1099-Misc. Either 2011 or 2012 ANYBODY that you pay more then $600 to you have to give a 1099MISC.
    I'm guessing(yes! I said GUESSING) this is where some of the "money" came from when they "balanced" the new Health Care Bill?!
     
  9. the iceman

    the iceman Proud Veteran CLM

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    This does nothing but force people underground.
     
  10. barbedwiresmile

    barbedwiresmile Unreconstructed

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    It has always been thus. The black market will always exist in direct proportion to the counter-economic confiscation and enforcement tactics of the state.