Technology has given businesses many different ways to collect payments from their customers, to the point that cash makes up only a portion of revenue for some businesses, and others do not receive cash at all. Credit card payments form a large part of how businesses collect payments, both through merchant accounts and services like PayPal. The fees associated with such payment methods are often more than worth the convenience they offer. Small businesses accepting credit cards through merchant accounts, in which a financial institution pays the business the amount of a transaction minus a small percentage, should know of recent legislation that may impose some reporting requirements on them come tax time.
The Housing Assistance Tax Act of 2008 became law in June 2008, primarily as a means of addressing the subprime mortgage crisis that had begun the previous year. The law mainly affects banks and other financial institutions that engage in mortgage lending, authorizing the Federal Housing Administration to guarantee certain fixed-rate mortgages and allowing states to refinance subprime mortgage loans. The financial crisis of late 2008 had a significant impact on Fannie Mae and Freddie Mac, two intended beneficiaries of the law, but certain provisions of the law have an impact even outside of the real estate sphere.
According to regulations from the Internal Revenue Service (IRS) that took effect in 2011, “payment settlement entities” must report payments made to merchants for credit card and other third-party credit transactions. “Payment settlement entities” are defined as banks and other financial companies that receive and process credit card, debit card, and other credit-based transactions for businesses (or “merchants.”) This does not impose any additional tax liability, but rather requires reporting by these payment settlement entities of the amounts they pay to merchants, which could be companies of any size or even individuals who accept credit cards as part of their business activities. These reports are included in a Form 1099-K issued by payment settlement entities at the end of each calendar (or fiscal) year.
The important consideration for companies that accept credit card payments is this: reports by payment settlement entities do not include any credits, offsets, discounts, refunds, or other modifications made by the merchant for the customer. This means that the amount stated by the payment settlement entity on the 1099-K might not match the amount of income reported by the merchant to the IRS. The merchant then has the responsibility of accounting for the difference in the corporate or partnership tax returns or Schedule C of a personal 1040 form.
Merchants who do not account for the difference between amounts reported on a 1099-K and the total income reported to the IRS may find themselves owing an additional tax bill based on the difference between the two amounts. Depending on the size of the merchant’s business, this could be a tiny amount or an enormous amount, but either way it represents an unnecessary complication. A little bit of awareness and a little extra scrutiny of one’s taxes will go a long way towards avoiding this problems.
The New York business attorneys at Samuel C. Berger, PC offer fixed-fee packages of legal services to businesses and entrepreneurs who want to do business in New York and northern New Jersey. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.
More Blog Posts:
Small Businesses Must Adapt in Order to Make It in a Bad Economy, New York & New Jersey Business Lawyer Blog, January 24, 2012
New Jersey Governor Signs New Law Providing New Funds for Businesses in Development Areas, New York & New Jersey Business Lawyer Blog, January 17, 2012
New Jersey Assembly Passes Bill Creating Small Business Loan Program, New York & New Jersey Business Lawyer Blog, December 13, 2011
Photo credit: Credit Card Chip by tnimalan on stock.xchng.