Beginning in 2012—but for tax year 2011—payment settlement entities (PSEs) must file an annual information report with the IRS stating the gross amounts paid to merchants during the year.
A PSE is a bank or other organization (e.g., Visa, MasterCard, etc.) that has a contractual obligation to make payments to merchants who have accepted debit or credit cards for payment from the PSE’s cardholders in exchange for the merchants’ services or products.
Since PSEs must provide a copy of the annual information report to their merchant payees, this new reporting requirement will also affect any businesses that accept credit cards, debit cards, or other electronic payments like PayPal.
What is filed?
The PSE must file Form 1099-K, Merchant Card and Third-Party Payments, to report the gross amount of payments a merchant receives from the reporting entity each month during the year.
Keep in mind that "gross amount" means the total dollar amount of all reportable payment transactions for each merchant without regard to any adjustments. You may have adjustments for credits, fees, cash equivalents, and discounted or refunded amounts.
What transactions are not reported?
Information reporting is not required for:
- Transactions in which the card is accepted as payment by a related merchant or other payee, as might be the case in certain private label, gift card, or mall card transactions
- Transactions with a third-party settlement organization where the gross amount of total reportable payments does not exceed $20,000 and the total number of such transactions does not exceed 200
How does this impact taxpayers receiving 1099-Ks?
In anticipation of possible future IRS inquiries, you may need to be able to reconcile your accounting records to the 1099-K amounts. Therefore, consider reviewing your bookkeeping policies for how you record gross sales and any related sales adjustments. Where previous transactions may have been recorded net of adjustments, you may now consider recording each transaction component separately. In addition, you may consider ways to distinguish between gross reportable payment card transactions and other gross receipts, such as cash sales and nonreportable payment card transactions. Detailed bookkeeping will help you match gross payment card sales to the 1099-K amounts and avoid double reporting of sales.
