As if keeping track of business expenses for IRS purposes wasn’t difficult enough, prepare yourself for a potential new headache: Form 1099-K [PDF]. Starting with the 2011 tax year, retailers who accept credit cards — both online and bricks-and-mortar — will have to include its figures in their federal filings.
Form 1099-K is meant to help the IRS determine whether retailers are reporting the correct sales figures on their tax returns. The burden lies on the credit-card and payment processing companies to file the document, but it’s your responsibility to make sure your sales records match what your Form 1099-K says you sold. (Note: Third-party networks such as eBay, Paypal, and Etsy will also file the documents for their sellers.)
The good news: If your business didn’t process $20,000 or more in credit card sales and at least 200 transactions in 2011, you’re not required to submit Form 1099-K. However, if you clear both thresholds, watch for a copy of your 1099-K in the mail this month.
The $20,000/200 transaction minimum applies to your total number of credit-card transactions. For example, let’s say your store used a credit-card processing machine for $10,000 in sales — and you also sold $5,000 in goods on eBay and $5,000 on Etsy. If you completed 200 or more total transactions in 2011, you are required to have Form 1099-Ks from each of these three parties. So, it’s a good idea to scrutinize every Form 1099-K that you receive, to make sure that the payment middlemen didn’t make any errors.
Scott Berger, a CPA at the Florida accounting firm Kaufman, Rossin & Co., says the businesses likely to experience the biggest problems are those that accept debit cards for payment and allow for cash back. “They will need to accurately keep track of the cash back provided to their customers, so it can be subtracted from their gross receipts. This way, the IRS will be able to reconcile their actual sales and revenue.”