IRS to Track Online Sellers' Payment Transactions Beginning Next Year
Internet sellers who don't report their sales will no longer be under the radar. Starting next year, any bank or other payment settlement company that processes credit cards, debit cards, and electronic payments such as PayPal will have to issue information returns telling the IRS what merchants receive. The new returns are Form 1099-K, Merchant Card and Third-Party Payments.
Purpose of Reporting
The IRS believes that many online sellers fail to report their transactions. Some don't report because they mistakenly believe that Internet sales are invisible. Others do so because they are trying to evade taxes.
The IRS has found that using information returns, such as W-2 forms for employees, Form 1099-MISC for independent contractors, and Form 1099-INT for bank interest, goes a long way toward improving the reporting of income. IRS computers can match income reported on these information returns with the income reported on tax returns.
Who's Subject to Reporting
All merchants who accept payments through credit cards, debit cards, gift cards and PayPal will receive information returns telling them - and the IRS - the gross amount of the merchant card transactions. This will be broken down month by month. While the form uses the word "card," the IRS has made it clear that this is interpreted broadly to include third-party network transactions (i.e., PayPal).
Exception: Very small merchants won't be issued information returns. "Small" for this purpose means annual gross sales on merchant cards of no more than $20,000 or 200 or fewer transactions. In other words, reporting is required only if gross amounts for the year exceed $20,000 and there are more than 200 transactions.
Mechanics
As it now stands (proposed regulations have not yet been finalized), gross amounts reported for merchant transactions do not take into account any adjustments for credits, cash equivalents, discount amounts, fees, chargebacks, refunded amounts, or any other amounts. It will be up to sellers to report on their returns the full amounts reported to them and then make adjustments or explanations to account for differences in what is ultimately taxable to them.
For example, a seller who is paid $1,000 by credit card for a particular transaction does not necessarily have $1,000 profit even though $1,000 will be included on Form 1099-K. The $1,000 must be reported so the return will match what's in the IRS computers, but this amount will then be reduced on the merchant's return by the cost of goods sold (what it costs for the inventory sold), merchant account fees, and other costs.
Providing Your Tax ID Number to Processors
Merchants will have to provide their federal tax identification numbers to the companies processing their transactions. If they fail to do so, they may become subject to "backup withholding," which means these companies will have to deduct and withhold income tax from reportable payments. Backup withholding won't go into effect until 2012.
Sellers who don't wish to provide their social security number to payment processors can obtain an EIN (Employer ID Number). Note that you can obtain an EIN even if you are a sole proprietorship. See the IRS website for more information.
More information on Form 1099-K
You can find more information about Form 1099-K, the new information return that payment settlement entities will use to report the gross amount of merchant card or third-party payments, on this IRS web page (PDF format).
See also, "What Every Merchant Should Know about New IRS Reporting Requirements" from this May 2009 EcommerceBytes article.
posted on March 7, 2010 09:14:32 AM
Fantastic! It is frustrating being an honest seller while knowing there are people out there hiding in the brush making profits and not claiming them. Hopefully this will weed out some bad apples.
One thing that bugs me to death are all of the antique dealers who rent small spaces in shops that never claim the income. I wish there would be more auditing done on antique malls. I am 100% positive that there are dealers, if not many dealers who never claim their income from sales. They go directly to the bank where the mall writes checks on and cashes the check. There are no requirements for the dealers to provide tax id, social security numbers, etc to the malls. I imagine the malls should be issuing 1099's, but don't.
I know of one junk mall owner who has an envelope at her counter. She has dealers work for her in exchange for rent (another way of hiding income since she should be claiming the value of the labor on her taxes). When the dealers sell something of hers in cash, they don't ring it up, but put the cash in her envelope. Doesn't ever get claimed. She never issues 1099s to any dealer there. They all fly under the radar and it really ticks me off because that is a competitive edge they have over us. This happens all over the USA and they are NOT paying their share of taxes which hurts state and federal revenues and is also a reason why those of us who are honest end up coughing up more money in higher tax burdens.
I am not sure why the Feds are ignoring sellers with under 20K. Sellers can easily have 2, 3, 4 or more accounts and stay under the radar.
posted on March 7, 2010 10:08:10 AM
I always claim what I make on eBay. I sell for other people as a TA so really only 35% of what I take in is mine. The only ones that are going to be worried about this are the ones shagmidmom talked about in her post - the ones hiding in the bushes. Come out, come out wherever you are. . . .
posted on March 7, 2010 10:37:46 AM
Shag said-
am not sure why the Feds are ignoring sellers with under 20K. Sellers can easily have 2, 3, 4 or more accounts and stay under the radar.
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If all these accounts have one paypal account,then they are all reported as one to IRS.
It is 20k and 200 transactions,say if your grandma sold a Tiffany lamp for 22k on Ebay,there is only one transaction,she does not have to report .
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There is no 'Global savings glut',only wild horses and loose bankers.
posted on March 7, 2010 02:42:12 PM
They'll catch the most egregious abusers, and the other 90 percent will continue business as usual. Your tax dollars at work.
posted on March 7, 2010 02:56:27 PM
It just mean we better have records of how much we paid for these items.
20k minus 14k cost of goods minus fees,labor ,supplies and gas =??
peanuts !
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There is no 'Global savings glut',only wild horses and loose bankers.
posted on March 11, 2010 03:50:52 AM
IRS knows how much we pay for shipping supplies and postage based on our sales volume,they have been dealing with mail order firms for years.
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There is no 'Global savings glut',only wild horses and loose bankers.
