What you need to know about tax form 1099-K, Merchant Card and Third-Party Payments

If you sell online or earn money through paypal you need to be aware of a new form that’s coming soon. Starting in 2011 many small business owners and online sellers will receive a new tax form, called a 1099-K. This form will report money received by debit cards, credit cards and online services like Paypal. If the total amount you receive through your Paypal account is over $20,000 then you will receive a 1099-K starting with the tax year 2011.

Up until 2011 the money received through these methods has not been visible to the IRS. Starting from the tax year 2011 the amount received through these methods will need to be recorded on the new form, 1099-K. The IRS is trying to encourage small business owners to report all their earnings by sending out the form.

If you currently report all your earnings then you really need not worry. It is not expected that the figure on the 1099-K will match the figures on the tax returns exactly. But if there is a big discrepancy, you need to be prepared to explain the reason why.

So, from the start of 2011 start recording not just your profit, but the total amount of money received in accounts such as your paypal account. I’m sure there will be an influx of accounting software you can link to your paypal account before the start of 2011.

This is a draft of what the form will look like http://www.irs.gov/pub/irs-dft/f1099k--dft.pdf

The service provider who makes the payment (eg paypal) will record the gross amount of third party payments on the new form, 1099-K. There will be no adjustments for chargebacks which some people are currently saying is a problem.

The 1099-K form is actually very similar to the 1099-INT and the 1099-DIV used by banks to report interest and dividends.

The form won’t be required until taxes for 2011 are filed, which is by April 15th 2012.

The IRS welcomes comments on this form. You can send an email to *taxforms@irs.gov and put the text "Draft 2011 Form 1099-K" in the subject line. Yes the * really is part of the email address. Or you can send a letter on paper to CC:PA:LPD:PR (REG-139255-08), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.