Not much slides under the Internal Revenue Service's radar, so it shouldn't come as a surprise that the IRS requires reporting of business income received through credit and debit card payments. This rule went into effect in 2011. If your business accepts credit card or debit card payments, each service provider that processes these transactions is obligated to submit an information return to the IRS.
Internal Revenue Code section 6050W(c)(2) requires that banks and merchant services must report annual gross payments processed by credit cards and/or debit cards to the IRS, as well as to the merchants who received them. Credit card payments are reported using Form 1099-K. Copies of the form are sent to both the business and to the IRS.
Details of Credit Card and Merchant Payment Reporting
Banks and other payment settlement services must report gross annual receipts for each merchant. The income reporting applies to "any transaction in which a payment card is accepted as payment," according to the IRS. Banks and other financial service providers must report the total gross amount of credit card and debit card payments for the year for each merchant.
Exception for De Minimis Payments
In IRS terms, "de minimis" generally means that an event is tax-neutral. The de minimis payment rule for the reporting of credit card payments provides that banks and payment settlement services do not have to issue Form 1099-K under certain circumstances. This information return isn't required if:
- A merchant's total payment transactions for the year don't exceed $20,000.
- The merchant's total number of transactions does not exceed 200.
Tips for Credit Card Reporting
Small businesses should regularly review and update their bookkeeping and accounting practices to make sure they can reconcile the information returns submitted by the banks when they receive copies. Any discrepancies in reporting must be addressed so accurate tax returns can be filed with the IRS.
Further details regarding credit card and merchant account reporting are outlined in regulations issued by the Internal Revenue Service in REG-139255-08. Among other issues, the IRS details who is responsible for reporting, how gross amounts are calculated, and it states that merchant payment firms can be required to withhold funds for backup withholding.
The IRS has also released instructions for Form 1099-K. Business owners and accountants should review this form to familiarize themselves with the format.
Keep Track of Chargebacks
The law requires that banks must report gross or total receipts, but merchants often have chargebacks where the card provider reverses a transaction due to fraud or because of some dispute. Merchants can issue refunds, or they might have debit card transactions where the customer receives cashback. Banks and other payment transaction services report only gross monthly and annual payments. Fees, chargebacks, refunds, and other similar items are not netted against gross amounts for IRS reporting purposes, and this can higher receipts being reported than were received.
Businesses should have thorough accounting procedures in place to keep track of these transactions separately. In other words, if you're accustomed to recording only a net deposit from a merchant account, it would be wise to separate those net amounts into gross receipts and the associated fees and refunds so your internal financial reports can be more easily reconciled to Form 1099-K.
Payment Card Reporting Requires Merchant Identification
Merchants must provide their payment processor with the full legal name of their businesses, their addresses, and their taxpayer-identification numbers so financial institutions can report credit card and debit card receipts. For most businesses, the taxpayer identification number would be their employer identification number or EIN. Payment processors might ask businesses to provide them with Forms W-9 so they can obtain this information.
Possible Backup Withholding Issues
Merchants who fail to provide their taxpayer identification numbers could become subject to backup withholding on their payments at a rate of 28 percent. Merchants should provide their card payment services provider with their names, addresses, and EINs to prevent backup withholding because it can leave a business in severe financial straits. Business owners who are struggling with tax debts should work with a tax professional to develop a repayment strategy that prevents any withholding on their card payments.