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The 2011 tax year is officially the first year for Form 1099-K, Merchant Card and Third Party Network Payments. Under this new requirement, Visa, American Express, PayPal, and similar third party settlement companies are to issue to each merchant, with a copy to the IRS, a report of the gross payments to the merchant for the year.
In anticipation of the change, the IRS modified all business income tax forms (corporation, partnership, and Form 1040 proprietorship schedules), segregating gross receipts into two lines:
“This new 1099-K system has implications for businesses that issue other 1099s, such as the Form 1099-MISC for various fees and independent contractor services,” says Chris Hesse, a tax partner with CliftonLarsonAllen. In addition, the IRS is deferring a portion of the 1099-K system for 2011.
Although the business income tax forms have been changed, the IRS apparently isn’t ready to fully implement the Form 1099-K mandate. The 1040 Schedule C instructions say “ … for 2011, the IRS has deferred the requirement to report these [1099-K] amounts.” However, there is no formal guidance, explaining what portion, if any, of the 1099-K system is in place for 2011.
Despite the deferment, businesses should plan on a fully implemented 1099-K reporting requirement in 2012. “Companies should review the 1099-K amounts reported to them for 2011 and confirm that their accounting systems properly reflect these gross receipts,” says Hesse.
The instructions for Form 1099-MISC indicate businesses should not complete Form 1099-MISC if the payment is already reported on a 1099-K (in other words, if the business paid for the service using a credit or debit card or other third party network). But you’ll still have to use the form to report other methods of payment.
“Payments to service providers made by check, wire transfer, electronic check, and direct deposit are still subject to Form 1099-MISC reporting,” according to Don Frank, partner-in-charge of outsourcing with CliftonLarsonAllen.
For 2011, some businesses will not be able to readily segregate those fee payments that are now exempt from 1099-MISC reporting. But going forward, proper separation of payments for services made via third party settlement entities will minimize the 1099s that the business must issue.
As the new 1099-K reporting system is fully implemented in 2012, businesses may need to modify their recordkeeping systems and distinguish service payments remitted via credit card or other third party settlement arrangements (which are exempt from 1099-MISC filing) from those remitted via check that are not exempt.
This provision was enacted as Sec. 6050W of the Housing and Economic Recovery Act of 2008, but became effective only in 2011. It is the first major change in 1099-MISC reporting since 1997, when payments to attorneys practicing through corporations were added to the required reporting.
Work with your tax advisor to navigate the 1099-MISC reporting requirements and determine how the new Form 1099-K impacts your business’s 2011 tax situation.
Chris Hesse, Tax Partnerchris.firstname.lastname@example.org or 612-397-3071
Don Frank, Partner-in-Charge of Outsourcingdon.email@example.com or 612-376-4676
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“Companies should review the 1099-K amounts reported to them for 2011 and confirm that their accounting systems properly reflect these gross receipts.”—Chris Hesse, Tax Partner