The Schedule Of 1099-K is the Rule of IRS as a Tool to Improve Voluntary Tax Compliance as Mandatory
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.
The IRS has many tax forms that taxpayers must file each year, but some are less known than others. The 1099 form is the second most popular tax form a person will file for their tax year, with the most popular being the W2 form. Understanding what the 1099 is used for, and why it should be filed, can help you determine if you will have to file this form this coming tax year or not.
What is a 1099 Form?
A 1099 form is very similar to a W2, in the sense that it states how much somebody has made for various services. There are several different 1099 forms, but two of the most popular are the 1099-MISC and the form 1099 interest. The 1099-MISC is the most basic form of a 1099 and is fairly simple to navigate. This is the form that a payer will send out to a payee in order for them to correctly file their taxes. Each year Payers of miscellaneous services must file the 1099 form so that the IRS is notified who is receiving income that hasn’t been previously taxed. Another popular version of the 1099, is the 1099-INT form. 1099 INT forms are filed when the payer has paid out interest payments during their tax year. 1099 INT forms are used report tax-exempt interest only. Taxable interest can be reported and filed on a 1099-OID form.
Who Should File a 1099?
If you have supplied goods or services to a business, you should receive a 1099 in the mail before February of the tax paying year. Typically those who are considered to be freelance workers are the people who get these forms the most. A lot of businesses may choose to outsource various jobs to freelancers. This allows the company to avoid paying overtime, and sometimes benefits. Those who take on the outsourced work and complete their job will be paid an amount that has not been taxed. Once tax season arrives it’s the freelancer’s responsibility to file their tax forms and claim any untaxed income they’ve received throughout the year. If for some reason you don’t get a tax form in the mail, the IRS has a copy on file, and they will send it to you. If the number on the form is different from the number you are claiming, you may need to speak to the company who filed the initial form. There are penalties and interest that will be imposed should a taxpayer not claim all their income or file their taxes at all.
All taxpayers should keep a close eye on their earnings throughout the year, especially if taxes aren’t being taken out. The IRS suggests that taxpayers who will have to pay out at the end of the year – which is typically the case with untaxed income – pay in quarterly. Paying quarterly allows freelancers to pay their taxes four times a year, rather than one lump sum in April. First-time freelancers may want to meet with an accountant who can help them understand what tax breaks they qualify for. Accountants are so helpful with filing the tax forms, as well. Tax season is never easy, but understanding how to file the forms required, such as form 1099 interest, can make the process easier in the long run.