Small Business – Avoid 1099-K Reporting Traps
July 27, 2016
If you process credit card sales you will receive a form 1099-K at tax time. The form 1099-K is an informational return that your credit card processor provides to you, and the IRS, and it reflects the reportable credit card transactions processed during the year.
With this information in hand, the IRS...
calculates your “reasonable” cash sales. If these “reasonable” cash sales and your credit card sales don’t meet their expectations there’s a good chance the IRS will send a letter informing you that your percentage of credit card sales to total sales was much higher than the industry average.
The real concern is that the IRS is not accounting for non-sale transactions such as refunds, employee tips, consignment sales, or sales tax collected (sales tax collected on behalf of customers is NOT a sale). However, the IRS has a 1099 showing gross receipts that include these items. This is a problem and if not handled properly at tax time, the most likely result is that you will receive a letter from the IRS informing you that they’ve calculated higher sales than you actually reported.
Another issue is that the IRS is using old data from when cash sales were higher than present day. The old cash collections data ignores the increased use of debit cards, which are reported as credit card sales on the 1099-K. This flawed data renders the IRS cash collection process useless and causes you, the business owner restless nights and unnecessary professional fees.
To make matters worse, some states are now receiving this bad data directly from the IRS and using it to generate letters to business owners demanding explanations!
So, how do you protect yourself?
- Treat 1099-K’s just like 1099-Misc forms.
- Make sure you have them all, add them up, and make sure your total receipts reflected on your tax return equal or exceed the 1099-K amount.
- Consider “grossing up” your sales to account for non-sale items such as refunds and sales tax.
- Or, better yet, make sure we have all of your 1099’s and let us worry about it.
With all the challenges of running a small business it’s not surprising that business owners might mishandle the reporting obligations relating to 1099-K’s. However, by implementing the strategies above and working with our professional team, you’ll be able to successfully navigate these challenges and sleep well at night.