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Tax Reporting Regulations for Merchant Accounts

It's March, and that means tax season. If you have a merchant account so your business can accept credit and debit card payments, you should have received a 1099-K form from your payment processor by the end of February. What do you do with this form and what are your tax obligations for money you receive from the processor? Here’s a quick rundown.

Tax reporting and merchant accounts

Beginning with the 2011 tax year, companies that process credit card payments for retailers are required by the IRS to report revenue from such sales that they send to a retailer, either by check, direct deposit or as money on account. You, the retailer, get a copy of this form and so does the IRS. To the retailer, this money from the processing vendor is revenue, just like cash sales. Unlike cash sales, the form lists your gross sales, not the net figure of the fees and other deductions. Not all retailers with merchant accounts will be getting a 1099-K form. There are a couple of exceptions to this reporting requirement:

  • Retailers who have less than 200 credit or debit card transactions per year
  • Retailers whose total credit and debit card transactions total less than $20,000

In these cases, the retailer will still be required to report the income, but they will not receive a form.

Reporting credit card income

Since companies with merchant accounts receive a 1099-K form with their gross receipts on it, you will need to reconcile this total with your net payments and any chargebacks, fees, refunds and debit card cash-back transactions. It's advisable to set up your bookkeeping to keep track of gross sales as well as separate entries for any deductions, rather than working with net credit sales.

Why is the IRS doing this? In part, they intend to discourage under-reporting of income as more retailers are able to accept credit and debit payments, thanks to recent advances in mobile credit card processing technology.

For businesses, freelancers and professionals who accept credit card payments via merchant accounts, these IRS reporting changes shouldn't require a lot of changes. Presumably, your business is already reporting this income. The new 1099-K form just means you have another form to file away with your tax records.

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