The year 2012 saw a new schedule through the rule of IRS in the form of 1099-K where in to improve voluntary tax compliance by business taxpayers as mandatory. The business entity like a payment settlement entity (PSE), a domestic or foreign organization, that acts as a bank and operates under the contractual obligation to make payments to participating payees who do not conduct transactions directly with payers. A PSE must file Form 1099-K for payments to the payee made by payment card transactions or in settlement of third-party payment networks. In the case of third-party entities, gross payments to the payee must exceed $20,000 and there must be more than 200 such transactions during the tax year.
For purposes of the form, a reportable payment transaction is a transaction in which a payment card (such as a credit card or gift card, debit card, prepaid telephone cards etc.) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or , any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card. Form 1099-K allows the U.S. government to track the rapid growth of e-commerce as a means of conducting business and ensuring that those who receive income from online transactions are reporting it and meeting their tax obligations.
More simply, the 1099-K allows the government to monitor sales of goods and services through payment cards and websites like PayPal and Amazon. It also provides income verification to the businesses that use either payment cards or third parties to obtain money from sales. The issuing of this form is also an opportunity for businesses to reconcile any discrepancies noted between their total gross receipts reported and the 1099-K information they receive.
In simple terms, taxpayers who have a credit card merchant account, PayPal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and Etsy sellers, affiliates, eBay merchants and other small businesses who accept credit cards, debit card or PayPal as payment.
This form 1099-K needs to be filed by merchants by January 31 but where-as the Payment Settlement Entity must file to the IRS by April 1 electronically or by February 28 via paper file.