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1099-K Regulations and Your Merchant Services Account

POSTED BY: Rhett Baylies
IRS 1099-K and your merchant services account.

Most buisiness could not survive 28% withholding of funds - has your Merchant Service Provider informed you?

The new IRS 1099-K regulations could have a huge impact on your business if you accept credit cards and your merchant service provider or credit card processing provider has not informed you of - you need to know this!

The IRS being the friendly bunch they are is putting another step in the process of reporting taxes for your business. Starting in January 2012 all businesses who accept credit cards are required to have their credit card sales reported by their payment card networks, otherwise known as your merchant services provider or independent payment network like American Express and Discover card. This new law serves to compare your total credit card sales information, from form 1099-K with your reported income claimed on tax returns.

With the 1099K deadline quickly approaching

and the rules still unclear or changing this new law is proving to be a huge if not poorly implemented change in the law. So here is the long and the short of it. If you accept credit cards your merchant services provider is now required by law to report your credit card sales on a the 1099-K form but there is one BIG catch you need to know! If your TIN (taxpayer identification number) and legal name on your credit card processing account do not EXACTLY match what is on file with the IRS then your merchant services provider is bound by law to withhold 28% of your payment card transactions!!!!

There are a number of problems with the new law most of which lead back to antiquated IRS data bases

and limits on the number of account inquires that are allowed over given time periods. As Payment processors continue to try and verify that their accounts exactly match what the IRS has on file there is now a huge backlog of inquires trying to validate the information. This backlog has led to many concerns that merchants are going to be unfairly levied with the 28% withholding penalty because the IRS can’t validate existing accounts prior to the deadline.
As the payment card industry scrambles to meet its end of the bargain the IRS continues to revise the regulations associated with the law!

So, how do you make sure that your merchant service account is validated?

Well if you have not already been notified on your statement or through a phone call then you should call your account representative and see if your account to accept credit cards has been cleared or if you are in line to be. The challenge for payment processors is that when they send in for validation it can take 1-2 weeks to get a report back from the IRS which of course only tells them if you match or not. So trying to “guess” what the problem is – can take a long time!

Why would your credit card processing account not match what the IRS has on file?

Part of the problem comes from the fact that most business owners are not sure what the IRS has on file associated with their taxpayer identification number and because many businesses are inconsistent with the business name on their tax returns from year to year. It can be as simple as using the “&” symbol instead of spelling out the word “and” or any other of a thousand abbreviations. The IRS’s computer system simply notes if there is a variation but does not provide what they have on file so it could be a transposed number, the use of a symbol, a mis-spelled word, word reversal, or any other possibility.

Credit Card Processors across the country are doing everything in their power to make sure that their accounts are all 1099-K validated prior to the deadline.

For many businesses a 28% withholding could spell the end of days so pay attention to your statements, special mailings, or phone calls for notices of information not matching. If you accept credit cards any data you can provide like business licenses, tax returns, or any other company information can greatly expedite the process and help your business avoid the severe 28% withholding penalty.

One thing is for sure and that is that your credit card processor does not want to be responsible for policing this new law by being forced to withhold funds.

They probably would have gone to the police academy if that was the case. With over 7 million merchant accounts across the country this is a massive undertaking especially when faced with antiquated systems, politics, different perspectives, and government agendas!

If you have any questions or comments about the new 1099-K regulations or if you accept credit cards and would like more information on any other merchant services subject please leave them below and the Merchant Doctor will answer them right away. Otherwise come on over to the Merchant Doctor on FaceBook and give us a like for the latest information that will save your business money! or Twitter!

About the Author: Rhett Baylies

After over 17 years in the service industry not only as an employee but business owner and corporate manager Rhett decided to start his career in the Payment industry with the vision of providing good honest service at a fair price. Rhett now applies his years of service focused business to his daily routine and looks forward to revolutionizing the way you look at your processing statement for many years to come.

Rhett Baylies's avatar
Rhett Baylies
Rhett Baylies | November 21 2011

The IRS just announced that they will delay penalty provisions and withholding requirements for a year, until Jan. 1, 2013. All acquirers still are required to file the 1099-K reporting form by year-end.

habib
habib | December 13 2011

Hi,
Thanks for your nice information. I like it.

Thanks.

Rhett Baylies
Rhett Baylies | December 13 2011

Thanks Habib we are glad you found it useful and thanks for the comment!

megan
megan | December 15 2011

I just called American Express Merchant Service regarding receiving my 1099-K for 2011.  They told me they were informed about 20 mins ago that the IRS has given a reprive for 2011 and I would not be receiving a 1099-k in 2012 for the tax year 2011.  They said I will receive a 1099-k in 2013 for the tax year 2012.  Have you heard this and is it true.

Rhett Baylies
Rhett Baylies | December 15 2011

Hi Megan-

Thanks for the question.  Yes that is correct, however, it only applies to any penalties derived from the IRS.  Acquiring banks (credit card processors) are still being required to submit the 1099-k report to the IRS by year’s end.

Megan
Megan | December 15 2011

Thanks Rhett for answering my question but I am confused.  Are you saying I will not get a 1099-K for the tax year 2011?  But the reported income will be sent to the IRS?

Megan
Megan | December 15 2011

When you say penalties are you saying any penalties I may incur?  How would I know if there was a penalty if I never rec’d a 1099-k to report my income?  I’m sorry I sound stupid, I just don’t know.

Megan
Megan | December 15 2011

Of course I would report all income received but I’m confused about who’s penalty.

Rhett Baylies
Rhett Baylies | December 15 2011

Hi Megan there are no “stupid” questions here!  Just as a disclosure we are definitely not tax advisers but to answer your question to the best on my knowledge:
The confusing part about this legislation is that the IRS requires the credit card processor to report the 1099-k this is not your responsibility; however, the information that your credit card processor has on file for your company (the TIN and legal name) MUST match what the IRS has on file for your business or the IRS will FORCE the credit card processor to with hold 28% of your credit card sales until the discrepancy is fixed.
Now here is the “funny” part—- the IRS will not reveal to your credit card processor what they have on file for your TIN and legal name due to privacy concerns.
So the most important thing for you to know as a merchant is that your credit card processor either has or has not verified your account.  Now don’t run out and sit on hold just to find out because most processors are working diligently on this and will notify you if there is a discrepancy—most likely on your monthly statement.
Because of the incredible backlog of merchant accounts needing verification the IRS was forced to postpone enforcement of the with holding penalty until January 2013.

Tina
Tina | January 27 2012

I mailed my federal and state returns in last week without realizing the 1099-K change.  I reported (as always) my 1099-K income as part of (most of) my General Income.  I received my 1099-K form in the mail today.  Will I be penalized for not reporting this income on the correct line??

Rhett Baylies
Rhett Baylies | January 27 2012

Hi Tina-
Thanks for the question!  Well as a disclosure The Merchant Doctor is not a CPA, however, the important thing for business owners to know about this new law is that the IRS is holding the credit card processors responsible not only for reporting every client’s credit card income but also using them to enforce the penalties.

The IRS did delay penalty provisions and withholding requirements for a year, until Jan. 1, 2013 because their systems and requirements could not be met on time. All acquirers, however, still are required to file the 1099-K reporting form by year-end.

Thanks again

Chris
Chris | January 31 2012

i have already filed my taxes, recieved my ferund, and was just now issued a 1099-k from paypal, if i do not amend my refund will i be penelized or are you saying the penalty’s wont start til 2013?

Rhett Baylies
Rhett Baylies | January 31 2012

Hi Chris-

Thank you for dropping in on our blog and for the comment.  As I stated the penalties will not start until 2013 but the responsibility of reporting is NOT yours it is a law that places the responsibility on your processor.  Please also note that your CPA can advise on tax issues.

Mike
Mike | February 02 2012

I received a 1099K from PayPal- The 1099K is showing 132.50 over the 20,000. I have added it up and PayPal is about $1,000.00 too much. I sell on eBay, and in 2011, I pretty much sold collectibles that were bought in previous years or in 2011. I don’t think I really turned a profit and if I did it would be under $2,500.00. I had to sell many things for a loss just to survive without an income for 2011. Do I need to report the 1099-K on my 2011 taxes? I’m currently trying to get PayPal to revise this, but I’m having no luck. The only people I’m allowed to talk to are entry level customer service reps that do not understand the 1099K.

Rhett Baylies
Rhett Baylies | February 02 2012

Hi Mike-  Sorry to hear about your struggle with PayPal.  Not being a CPA I am unable to advise you on whether or not to report 1099k income.  PayPal and all credit card processors are required by law to report any income (transactions) conducted with a credit card and paid to an individual or business regardless of profit or loss.  Again when it comes to your responsibilities I have to defer to a tax expert.  The intention of this blog is to inform merchants and business owners that the processors are required by law to report the gross sales of all their clients directly to the IRS. Thank you for your comment I wish I could be of more assistance.

dan prosser
dan prosser | February 06 2012

I have a Discover card and get a 1% back bonus on my account.  As an individual, do I have to report that amount on the 1099-K or any other form?

Rhett Baylies
Rhett Baylies | February 06 2012

Hi Dan-

Thanks for the question.  Unfortunately as I have mentioned this post is merely intended to inform business owners of the new law requirements so that they can understand why their credit card processor is reporting income on their behalf.  Not being a CPA I am unable to answer your specific question and I will have to recommend that you ask a tax professional.

ron kraut
ron kraut | February 06 2012

i am expecting a 1099-k from an old credit card processor and to this date have not received it. i have however received one from my current processor, although i have had a problem with my name and tin issue. they claimed my tin or business name didnt match after 2 attempts i was told it was my ss# that was needed as i dont have a tin. seeing as though i received my 1099-k from this processor does this mean that the discrepancy issue no longer exist? and what is the deadline for the other processor to send me my 1099-K?

Rhett Baylies
Rhett Baylies | February 06 2012

Hi Ron-

Thanks for taking part in the discussion.  The answer to your first question is a vague maybe….sorry. It is going to depend because the processors are required to report the 1099 information regardless of a proper match-—so they may have found the error and rectified but it is possible that they did not.  The good news is that since the with holding requirements have been delayed until 1/1/2013 (which won’t happen if you believe the Mayans….sorry I could not resist)which means that processors and the IRS have a full year to figure out any discrepancies.

OK question number two is going to depend on how much volume you did with your previous processor.  This is directly off of the IRS website:
The 1099-K is a new IRS information return for reporting electronic financial transactions to improve voluntary tax compliance. You should get a 1099-K by the end of January 2012 if, in 2011 you received payments from:

  merchant card transactions (e.g., debit or credit cards) OR,
  in settlement of third party payment networks (e.g., PayPal or Google Checkout) at or above our minimum reporting thresholds
  -gross payments that exceed $20,000, AND
  -more than 200 such transactions.

In other words:
No information report will be required if a merchant’s total payment transactions for the year does not exceed $20,000, and the total number of transactions does not exceed 200.

I hope this is helpful and thanks again for the questions!

ron kraut
ron kraut | February 06 2012

are you saying that if my total revenue from credit card processors does not exceed 20,000.00 and my transactions are under 200 i will only have to report my income as i normally would and not have to pull my credit card receipts from my income and separate the two of them ( meaning i can treat all my income colectively )?

Rhett Baylies
Rhett Baylies | February 06 2012

Hi Ron-

We are getting out of my jurisdiction so to speak.  The quoted requirements are what the IRS set for merchant service providers.  Any advice directly related to your individual or business taxes have to be answer by a certified tax specialist.  Sorry…but thanks for the questions!

Sincerely,
Rhett Baylies

ron kraut
ron kraut | February 06 2012

ok rhett could you just be a little clearer on this paragraph?  information report will be required if a merchant’s total payment transactions for the year does not exceed $20,000, and the total number of transactions does not exceed 200. i appreciate you not being able to give me tax advise just a little more clarity on this paragraph.

Rhett Baylies
Rhett Baylies | February 07 2012

HI Ron-

The word NO is missing from in front of information in your quote.  So basically the IRS is saying that if a business does LESS than $20k AND LESS than 200 transactions then the processor is NOT required to report.  However, if a business exceeds either of those levels then the processor IS required to report the gross sales to the IRS on a 1099-k form and notify the merchant of what they reported.

So if you have a business that fell below those levels you will not see a 1099 from the processor.

Hope that clarifies it - the IRS is never one to word things easily.  After all what fun would that be?

Thanks again!

Amanda Morgan
Amanda Morgan | February 22 2012

I just received a 1099K from paypal. I have already filed and received my refund.  I was $152 over the allowed $20,000, but only made a profit of around $3000 after expenses.  Please advise on how long I have to file the 1099K.  Must I amend my 2011 return by year end or can I file the 1099K in 1/2013 when I file my tax return?

Thanks for your time.

Rhett Baylies
Rhett Baylies | February 23 2012

Hi Amanda-

The 1099k report that you received from PayPal is them notifying you that they have fulfilled their responsibility to the IRS to report your total credit card sales for the year.  As far as tax advice I once again have to defer you to your preferred tax professional as we are a merchant service provider and not CPAs.  The IRS is not concerned with profit when it comes to the law I am speaking of in this blog as that is up to you to provide income reports with your tax return. They are strictly concerned with making sure that the sales a business reports match what they say with their tax return. Sorry wish I could say more!

Tyson
Tyson | March 14 2012

I sold my business in january 2011 but I received 1099k from bank that from january to april I’ve made about $19k and less than 200 transaction. How do I fix this error?  Thanks advance for your help

lien yung
lien yung | March 15 2012

on the 1099 K amount, it only consisted of gross sales, right? Does it also included refund too? please advice.

thank you.

Cheri
Cheri | April 05 2012

I received a 109-K from Paypal & had to get ahold of them because I have been letting my friend use my paypal account for years so he could sell on ebay. For years he has paid quarterly taxes on his ebay business & now I get this. So we did get Paypal to change then name on the account from mine to his, but how do we get the 1099-K revised to his name. As I mentioned before, he sends quarterly taxes into IRS for this business every year, so he has actually already paid in the taxes & I have not. I have already filed & received my taxes & now we don’t know what to do….

Rhett Baylies
Rhett Baylies | April 05 2012

Hi Cheri-

Unfortunately I am not a certified CPA so I cannot provide you with tax advise on your situation.  The intention of this article was to merely inform business owners of the IRS requirement that Merchant Service Providers report this information and of the proposed penalties for not complying with the regulations. Obviously you are expected to report any income that is in your name.  Any advice beyond that will have to come from your tax preparer.  It is always a bad idea to let anyone use your PayPal account not only from a security perspective but liability as well.  PayPal accounts and Merchant Service accounts are very easy to obtain and should never be shared.

Rhonda
Rhonda | April 17 2012

I have not filed a tax return in over 6 years as I have not been employed.  I sell and purchase items on eBay.  I received a 1099 K from paypal and I am not sure what type of tax form or I need to use since I have not filed a return in 6 years and currently have no income coming in from an employer.

frofonusnet
frofonusnet | June 07 2012

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skibits
skibits | January 24 2013

My credit card merchant keeps putting the 1099K in my name and my social security number, not my registered company’s name. This is the second year they have done this. They said the IRS has accepted it under my name and they were not going to change it in to the company’s name. That it would be up to me to make the change with the IRS. I don’t know what to do. I do know that I want to drop them and get another service. If I do that, and put it in to the company’s name, will that be an issue for 2014?
Thanks

Rhett Baylies
Rhett Baylies | January 24 2013

Hi SkiBits.  Thank you for your comment and we are sorry to hear about your frustrations. Absolutely not a problem as long as your business has a separate tax ID from your personal social security number. We would be happy to assist your with the process to ensure that you are set up correctly for your business and tax needs combined with the absolutely best service and rates available. We lool forward to hearing back from you.

Karen
Karen | January 31 2013

My merchant account has my social security number and name, therefore, the 1099-K shows that information.  It should have my business name and tax ID number.  I informed them of the correction.  How do I clarify with the IRS that the first 1099-K is incorrect?

Rhett Baylies
Rhett Baylies | February 01 2013

Hi Karen -

Thanks for the Question.  It is going to be up to your processor to make the corrections available to IRS, however, please contact your CPA to see if they can assist as we are experts from the processing end and are not certified tax consultants.

DCWVendor
DCWVendor | March 11 2013

Hello,

Just perused your blog as I was searching for others who have run into a similar issue with American Express Merchant Services.  I received the notices from my merchant service company Elavon regarding the verification of TIN and company info, which was verified, I guess, as I have not any withholding from them. I had mailed one to American Express as well. Had to do it twice as I received yet another notice, which led me to believe they did not get the first. The second time I faxed it to AMEX using the form they proviced, this was August 2011, and was a Final Notice.  Thought that was that. In January 2013 I process an AMEX transaction in excess of $16K, and discovered in my February bank statement they withheld the taxes in excess of 35%! Called AMEX not knowing what had happen to be told they did not have updated TIN information, and they claimed to have sent the funds to the IRS. I then requested that the funds, for I had complied with their request by fax in Aug. 2011. Also requested that the funds be returned and they said they would have to open a case to review and would expedite.  After a week I called back and asked to speak to the Amercian offices rather than the Phillipines office that the 1099 questions calls get routed.  Having kept the documentation and the fax verifiction reciept, I agreed to fax again, although unfcomfortable with their processing center I requested an address and a person’s name to address the letter.  They would only give me “The Office of the Preident” and PO Box.  So my question is, if you have met the requirements, and the merchant processor did not verify and notify that they recieved it, (they are claiming not to have received anything), then how does one get the funds back without waiting until the filing of the tax return for that year? This incredibly unfair to a merchant, especially on large amounts!

Frustrated in Los Angeles!

Rhett Baylies
Rhett Baylies | March 12 2013

Hi DCWVendor-

I am sorry to hear about your frustration and I think this is going to be a problem for a lot of merchants this year.  The problem lies in the inefficiency of the systems that the IRS has in place and the rules in place to protect your privacy.  Unfortunately until the processor is able to validate and receive confirmation from the IRS those funds are with held!

With AMEX you need to know that they are a 3rd party payment provider so your processor (Elavon) will not be able to do much there.

As for the problem with your TIN please note as I mention in the blog that ANY discrepancy in the business name and that on your merchant account will trigger a mi-match whether it is a period, dash, capital letters, extra space, etc….

I completely agree that the system is unfair as the verification process was not refined before implementing the penalties.  Unfortunately, however, the payment industry is stuck with being the police regardless.

I wish I could be of more assistance, however, Elavon is not one of the processors that the Merchant Doctor currently works with so the best person to contact would be your sales representative and ask them to escalate the process.

Harpreet
Harpreet | March 23 2013

they took of the 1099k on most tax software if you use any software their is no where to report your 1099k income now so i am assuming how are people getting penalties when you cant even include this on your return and how would you know if you getting hit with penalties?

Rhett Baylies
Rhett Baylies | March 29 2013

Hi Harpreet- Thank you for your question.  I am a little unclear on what specific information you need however your payment processor should be able to advise you as to whether or not your TIN matches as they are responsible to report 1099 info to both the IRS and to you so that you can submit with your tax return.  If the TIN does not match then you are subject to the withholding penalty and you can work with them to fix the mismatch.

Regina Sargeant
Regina Sargeant | March 31 2014

A friend’s 1099 did not match her sales records and when she inquired with Elavon, she was told that the 1099 included her sales, state income tax paid and Elavon fees.  Isn’t this wrong?  Why should she pay federal taxes on states taxes and Elavon fees?  Has anyone else had this problem?  Thank you.

rhett baylies
rhett baylies | March 31 2014

Hi Regina-

Thank you for the comment.  As I discussed the IRS requires processors to report the Gross sales for each of their clients.  I am not a tax professional but I would assume the thought behind that requirement is that the fees are deductible as business expense so technically the business would not be paying taxes on the difference.  I would recommend discussing this with your tax professional.  Thanks again I hope that is helpful!
Sincerely,
Rhett

Anthony
Anthony | March 27 2015

Just curious why Paypal did not in a time matters informe their customers about 1099/k form. I think that Ebay is as guilty as Paypal.  Please advice

Tera Roselin
Tera Roselin | December 25 2015

Hi, as long as my merchant company is filing the 1099-k form and I am doing my business taxes as a sole proprietor, it’s the cc processors responsibility to turn in my gross credit card receipts right? What if I haven’t filed my taxes for a few years and I personally have never filled out a 1099-k form ... will that be the reason my account is now being deducted (28% of my credit card settlements), this just stared Dec 8th 2015.  Regardless of tax returns, the cc processors are still reporting my gross cc sales. Why all of a sudden would my TIN or name not match? Doesn’t make sense. Thanks!

Rhett
Rhett | December 29 2015

Hi Tera

Yes by law all credit card processors are required to report credit card sales to the IRS, however, if you are experiencing the 28% withholding that is because your TIN that is on record with your processor does not EXACTLY match that which the IRS has on file.  That means if there is a comma, dash, or letter missing the IRS’s system will not recognize your company’s filing as it compares with the 1099k.  Seeing that we are not CPAs and if you have never filed taxes for your business I recommend that you will need to contact an accountant.
If you want to resolve the 28% withholding you may contact your processor and they should work with you to resolve the way your legal business name is filed to match the IRS’s records.  If they are not willing to assist give us a call we would be happy to set you up with a merchant account!

Terry Lichtenstein
Terry Lichtenstein | March 23 2016

My reported income does not match the 100k sent by Bank of America and American Express Merchant Services.  B of A informed me that the amount reported to the IRS is sales only, no refunds.  So I deducted the refunds and removed a huge chunk.  I am still showing, however,  over a $1000 less reported to the IRS.  I have poured over and over the Statements and cannot find the discrepancy.  My numbers come up the same no matter how many times I do them.  Do you know of any other differences that could have been reported in a 1099K that a merchant would not report?  Thank you.

Rhett Baylies
Rhett Baylies | March 23 2016

Hi Terry-

Sounds like maybe a better question for your CPA.  However, if you switched merchant accounts early in the year or had chargebacks that could account for it.  Remember processors are required by the IRS to report GROSS sales not sales after rates and fees. 

Since we specialize in the payment processing side of things, unfortunately, I am unable to provide further advice.

Tony Zen
Tony Zen | June 07 2017

My merchant First Data Withheld money for the State and Fed for a discrepancy with the EIN number which we later on corrected and they stopped withholding.  The problem is getting the money back, we filed the tax returns and showed the money as prepayment but the Federal says that do not have the money and First Data says my proof of prepayment is the 1099-K they sent me.  Now I am stock between the IRS and The merchant.

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