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New IRS Payment Reporting Rules for Businesses Could Bring Form 1099 Confusion in 2012

For small business owners, tax preparation for 2011 could bring some confusion surrounding the proper way to report payments to vendors on the IRS’s Form1099-MISC. Form 1099-MISC has always been used to report to the IRS payments of $600 or more made by businesses to small vendors, mostly non-corporate entities, for rent or services. But the IRS, in an attempt to be more thorough in its collection of business income taxes, has created a potential 1099 nightmare.

In order to capture business transactions completed by credit card or payment services such as PayPal, which might have previously gone under the radar, the IRS is now requiring that these payments be reported directly by the payment processors themselves. Ostensibly to lessen any confusion, the IRS also created a new form, the 1099-K, specifically for the reporting of such transactions. Payment processors will be issuing 1099-K’s to businesses to whom they’ve made at least 200 payments totaling at least $20,000 during 2011.

On the other side of the equation, business owners will be instructed not to list payments they made to vendors via credit card on Form 1099-MISC. That form will be only for payments by cash or check. The question is whether all business tax filers will be aware of the change. It’s highly likely that some people will not re-read the instructions for a form that’s been around as long as the 1099-MISC. Thus it’s quite possible that many credit card transactions will be reported twice – once on a 1099-MISC by a business payer who’s unaware of the 1099 reporting changes, and once on a 1099-K by the payment processing company that handled the transaction.

The situation is not helped by the fact that the creation of the 1099-K came relatively late in the game, so that businesses had no way of knowing throughout the year how important it would be to track the method of payment used for each transaction with a vendor. Businesses that do not have ready access this information may be facing a time-consuming effort to determine which vendor payments to list on 1099-MISC forms and which to leave off.

You can be ready for the change by ensuring that your business is able to break out credit card payments to vendors separately from cash and check payments, and by being sure that you or any employees who have a hand in preparing your business tax return understand the new rules. Also, as you begin to receive 1099 forms from payers early next year, check to make sure that none of them list transactions that you paid via credit card or other payment processing service.

So far the IRS has not yet finalized the 1099-K form or the instructions for it, but they will be available on the IRS website. If you have questions about the changes to 1099 reporting, your best bet is to get the advice of a qualified business tax professional.

PADGETT BUSINESS SERVICES® can provide you with expert tax advice and a complete range of business tax services, including preparation of returns for income taxes, payroll taxes and sales and use taxes. We also have IRS enrolled agents who can represent you in an IRS audit or income tax dispute.