IRS Eases 1099-K Rules for Credit Card Payment Processing

Have you heard the latest news about the 1099-K? Merchants everywhere are breathing a sigh of relief as the IRS recently eased its approach to the new Form 1099-K that details merchants’ credit card payment processing volume.

Now before I get into the details, please know that I’m not a tax expert or a tax accountant. That’s why it’s important that you speak with your tax advisor to better understand the impact of the 1099-K on your financial institution’s merchant services program. He or she will then be able to relate the changes to your specific situation.

Did the rules change?

Recently the IRS changed two tax forms so that merchants could report their credit card payment processing volume on the new Form 1099-K. Specifically, a new line was added to both the 1120 and Schedule C titled “Merchant card and third party payments.” Then came news from the IRS to basically ignore this line. Instead businesses should now enter zero on line 1a and include all income on line 1b (“Gross receipts or sales”), regardless of how it was received.

In a nutshell, this means that merchants are no longer required to report their exact volume on their 1099-K. I’m sure this has many merchants jumping for joy because they don’t have to reconcile potential discrepancies between their 1099-K and their business records. However, keep in mind that the IRS still has a copy of the 1099-K so they will surely notice any significant differences between the two.

What did they change?

This change has left many speculating. Personally, I think it’s because the IRS realized the complexity involved in 1099-K reporting and how much confusion it was creating among merchants. For example, did you know that the biggest payment processor asked the IRS for an extension because it was unable to provide all of its credit card payment processing customers with a 1099-K by the January 31 deadline?

At Clearent, we met this deadline, but I’d like to add that it was an extremely involved process and we’ve received many questions from merchants. Several questioned the accuracy of their data, even though we assured them that it was indeed correct. It’s just that most merchants don’t easily understand the arcane rules for how the data must be reported.

With tax time right around the corner, I think the IRS feared a backlash from merchants and tax professionals, so that’s why they opted to ease the 1099-K rules. I have a feeling the IRS’ decision is helping both parties breathe much easier.

What will happen next year?

Only time will tell, but a recent FAQ published by the IRS is causing many to wonder if they will have to reconcile their 1099-K in the future. If that is the case, the new line 1a might be removed from the tax forms, plus we could very well see the IRS postpone the backup withholding and penalties that are schedule to start next year.

But for the time being, I’m sure businesses everywhere are thankful for not having to reconcile their credit card payment processing volume. We will be sure to relay any future updates from the IRS, so stayed tuned for more information.

What impact has the 1099-K had on your financial institution’s merchant services program? Have you received many questions from your merchants? What is your merchant services provider doing to help bring you up to speed?