If you run a company that accepts payments by credit, debit, or stored value cards or via third-party settlement companies such as PayPal, it is critical that you understand your IRS requirements. Since 2011, the IRS has required this form of company revenue to be reported.
Each service provider that processes these transactions is potentially required to submit information about them both to you, the merchant, and directly to the IRS. This article will provide a comprehensive understanding of your reporting obligations, helping you navigate this complex aspect of your financial landscape accurately and confidently.
Legal Requirements for Reporting Payments
The legal requirements for reporting these payments are detailed in the Internal Revenue Code section 6050W(c)(2). Under this section, payment settlement entities (PSEs), such as credit card companies or third-party organizations like PayPal, are mandated to report gross payments processed for merchants in a calendar year. This information is reported on Form 1099-K, which is issued to both the IRS and the merchant.
The threshold for reporting is a total gross payment volume over $20,000 and more than 200 transactions in a year. It’s important for merchants to understand that these figures represent gross sales, not net sales; refunds and returns are not subtracted for this reporting purpose. Non-compliance with these requirements may result in penalties, making accurate record-keeping and reporting critical for all businesses.
Details of Credit Card and Payment App Reporting
Credit card companies and payment app providers adhere to specific guidelines when reporting to the IRS. For credit card companies, each transaction is reported as a transaction regardless of its total amount or frequency. This means that every time a customer uses a credit card to pay for goods or services, it is recorded and reported.
On the other hand, third-party payment apps such as PayPal or Square have different reporting thresholds. Unless a merchant has over 200 transactions and the gross payment volume exceeds $20,000 in a calendar year, these payment apps are not required to report payments. If these thresholds are met, however, reporting becomes mandatory.
The figures reported represent the gross amount of transactions, not the net amount after fees and adjustments. This is important to note because it means the reported figures can exceed the amount the merchant actually receives.
Additionally, all transactional charges, including proportional fees from the PSE, are included in the gross amounts reported on Form 1099-K. Therefore, the amount reported on Form 1099-K might not match the sum in your bank account, which is a crucial point for merchants to understand and monitor.
Understanding De Minimis Payments
The term “de minimise” refers to something that is too trivial or minor to merit consideration. In the context of payment transactions, de minimis payments generally refer to the minimum amount that must be accumulated before a payment processor is required to report the transactions to the IRS. De minimis rules imply that certain small transactions may not be subjected to the same reporting requirements as larger ones, thereby reducing the reporting burden on businesses and payment processors.
In 2021, these de minimis rules underwent a significant change. Under the American Rescue Plan Act of 2021, the reporting threshold for third-party payment processors like PayPal or Square has been reduced substantially for tax years beginning after December 31, 2022. The new threshold is $600, irrespective of the number of transactions, which is a departure from the previous rule of 200 transactions and over $20,000 in gross payment volume.
This change in de minimis rules implies that more transactions will be reportable to the IRS, including those conducted through payment apps. Therefore, businesses need to pay close attention to their record-keeping practices to ensure they are ready to comply with these changes when they come into effect. As always, seeking advice from tax professionals can provide further clarity on how these changes might impact your business.
Tips for Reporting Credit Card and App Payments
- Maintain Accurate Records: Keep track of all transactions, including dates, amounts, and the nature of goods or services sold. Keeping accurate records helps ensure your reporting is correct and can be invaluable if your business is audited.
- Understand Your Reporting Obligations: Your obligations vary depending on the platform through which you receive payments. Familiarize yourself with the reporting requirements for each platform you use.
- Review Your Payments Regularly: Regular reviews of your bookkeeping and accounting practices can help you identify and address discrepancies in your reporting before they become serious issues.
- Stay Up-to-Date With IRS Regulations: IRS regulations can change. It’s important to stay informed about any changes that might affect your reporting obligations. Refer to IRS publication n-09-19 for detailed information.
- Seek Professional Advice: Tax law can be complex, and understanding your obligations can be challenging. Consider seeking advice from a tax professional to ensure you’re meeting your reporting requirements.
- Use Payment Receipt Samples: Payment receipt samples can provide a useful template for recording transactions. By using a consistent format, you’ll make it easier to track and report your transactions.
Conclusion
In conclusion, understanding and adhering to IRS reporting requirements for credit card and payment app transactions is a crucial aspect of running a business. The regulations, such as those detailed in Internal Revenue Code section 6050W(c)(2), dictate the reporting of gross payment volumes on Form 1099-K and understanding the threshold for reporting. Additionally, with the recent changes to de minimis payments, it’s more important than ever to keep accurate records and review your payments regularly.
Compliance with these regulations not only ensures your business stays within the confines of the law but it can also provide crucial insights into your business’s financial health. Stay informed, seek professional advice when needed, and maintain a deep understanding of your reporting obligations to successfully navigate these aspects of your business finance.