UPDATE: I’ve created a FAQ about Form 1099-K here.
ANOTHER UPDATE: The IRS is now issuing notices based on Form 1099-K. Here’s what to do if you receive a notice from the IRS.
Last week I went to my annual continuing professional education “tax update.” This year, not a whole lot changed relative to the small business owners and freelancers who are my primary readers and clients.
But get this.
Imagine that you’re receiving those little “1099” forms next January, otherwise known as “information returns.” One copy is provided by the payor (such as PayPal or your merchant services provider) to the payee (such as yourself), and one copy goes to the IRS. The forms must be submitted to you by January 31, 2012 and to the IRS by February 28, 2012.
Which means that you’ll start receiving the new Form 1099-K just in time to prepare your 2011 taxes.
What is “the new Form 1099-K,” you ask?
Section 6050W (which was added to the Internal Revenue Code by the Housing Assistance Tax Act of 2008, for those who like to keep track) states that:
All payments made in settlement of payment card transactions [such as those for credit or debit cards] are required to be reported….Payments made in settlement of third party network transactions [such as those for PayPal or Google Checkout], however, are required to be reported only if the amount paid exceeds $20,000 and the aggregate number of transactions exceeds 200 with respect to any payee within a calendar year.
It’s also important to note that the new Form 1099-K is an additional information return, and does not change what is reported on existing 1099-MISC forms.
There are also some unfortunate accuracy-related penalties and income tax withholding requirements associated with Section 6050W, but the IRS just this week indicated that they will provide “special transitional relief” for this year only. I won’t discuss that relief here because like all things related to the tax code, it’s liable to change. Plus I’m sure your eyes are already glazing over. (If you have a question, just ask your tax pro.)
As a result of Section 6050W, the IRS has revised Schedule C for 2011 (which is the tax form upon which you report the income and expenses for your unincorporated small business). For the curious, the current draft of Schedule C shows that 1099-K income is to be reported separately from other gross receipts and sales on your Form 1040. Of course this draft is liable to change too.
But this separate reporting of income will cause problems to many Schedule C filers. For example, the amounts reported on Form 1099-K won’t necessarily match true sales because those amounts will include sales tax, shipping, and other non-sales charges.
TaxGirl over at Forbes has this to say about that issue:
“The IRS has indicated that they might have some solutions for those pesky gross income reporting issues. Many practitioners had expressed concern about the requirement to report gross receipts paid out without regard to chargebacks, fees or other adjustments with many worried that such discrepancies would raise flags at IRS. Future guidance on this issue is expected to be released.”
I’ll keep you posted about that guidance, natch. 🙂