NEW YORK (
) -- By the end of January, a few million small businesses will have a new tax reporting form in their hands called the
As part of it, payment networks such as
as well as banks and credit card processors are now required to report credit card, debit card and gift card payments, among others, made to merchants for goods and services.
Payment processors must send out annual 1099-K forms to any small business that sells more than $20,000 in goods or services and has 200 payments during the year with any
payment processor, the ruling says.
The Internal Revenue Service
that brought the form into being was actually enacted as part of the Housing and Economic Recovery Act of 2008, then pushed back.
CEO Steven Aldrich offered tips for small businesses on how to handle the forms.
What prompted the ruling?
More and more revenue was flowing electronically and the IRS has been trying to figure out where revenue is showing up that's currently not tracked. ... The next question from Congress was what about all the revenue through credit card companies and electronic commerce payment networks? That was the progenitor: "Let's go after online and offline merchant processing revenue."
But isn't that repetitive for small-business owners that are already reporting the income?
The small businesses that I talk to are doing their very best to be on top of how much revenue they made and report that as part of their tax filings. What this does from a compliance perspective is allow the IRS to match up tax filings with the sources of their revenue.
This is really a verification step that the IRS is putting in place. You might call it a paperwork burden that's being placed on the small business now because the government wants to ensure that they have the ability to verify the amount that the small businesses are earning. I don't think small businesses are avoiding taxes. I think this is an attempt by Congress
to identify money in the system: "Let's get a check on the numbers that small businesses are sending."
So what does this change for small businesses?
For businesses that have $20,000 in revenue
200 transactions or more during tax year 2011
at a given processor, they have to take this form that just shows gross revenue processed by PayPal or Amazon or their credit card processing company and compare it to what they will report on their taxes. That is now the burden that the small-business owner has to deal with when they are getting their taxes together for 2011.
The small-business owner is going to get this 1099 form. It's going to have a gross revenue number on it as well as a month-by-month breakdown of what the processor transacted on behalf of the small business,
but they will have to go from this gross revenue to what the IRS needs, which is the net income number. Small businesses will need to subtract out returns, fees, exchanges and mistakes. It's going to require that the small business take the gross revenue number and separate out all of the expenses and fees they shouldn't be paying taxes on.
How many small business owners will this actually affect?
There are 21 million small businesses that are solo entrepreneurs in the U.S., of the 28 million in total. The average
annual revenue of that solo entrepreneur is roughly $40,000. It's possible that it could be millions of businesses that get tripped up by this.
But the way the law reads -- it's $20,000 and 200 transactions with a specific third-party network, because if I am selling on eBay and PayPal is processing and selling on Amazon and I've got a retail store where
is processing -- those three folks can't talk to each other. Each one of these firms is looking at it individually. Interestingly, that's probably not quite how the IRS meant the rule to be interpreted, but there is no other way to deal with it right now.
What else should small businesses know about the new form?
It raises the importance of having a good understanding of all of their expenses attached for the year and any fees they had to process with these transactions. It's really important that the small businesses have all of those fees and expenses in a format ... that they can accurately report their taxes and reconcile back to this gross 1099-k amount.
The important thing for business owners when you get this form is "don't panic." It's a number that's somewhere in your business if you have good record-keeping. If you're already tracking your revenue and expenses in an accurate way you're in good shape. If you're not, now would be a good time to start, as opposed to April 14.
-- Written by Laurie Kulikowski in New York.
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