New IRS regulations — known as Section 6050W and enacted as part of the Housing and Economic Recovery Act of 2008 — went into effect at the beginning of 2011 and significantly impact the payment card industry. As a merchant, you should understand how Section 6050W affects you and your business.
Report Transactions to IRS
Under Section 6050W, all payment settlement entities — including merchant services providers and financial institutions — are required to report their merchants’ annual gross payment card transactions processed by credit, debit or co-branded cards and third-party network transactions (flexible spending accounts, for example) to the IRS on newly-created 1099-K forms; each merchant will receive a copy of the form. This information, which is accumulated monthly, will be used by the IRS to verify financial data it receives from other sources.
Form 1099-K will be sent to merchants on or before January 31 each year for the activity of the prior year.
Compliance with 6050W
To comply with this new regulation, payment settlement entities need to have up-to-date records of their merchants’ legal business names, addresses and taxpayer identification numbers (typically the EIN). This information must match the merchants’ filed tax forms in order to be valid. Expect your payment processor to ask you to provide a Form W-9 with this information.
Merchants who fail to provide their taxpayer ID number could be hit with a backup withholding equal to 28% of their gross payment card transactions.
Now that the first reporting period has begun, merchants should be proactive when it comes to compliance — especially since the financial consequences of non-compliance could be steep.
Merchants should start by reviewing their bookkeeping and accounting practices. One area of concern that you as a merchant should be aware of is that while the new law requires payment settlement entities to report merchants’ gross payment card transactions, Form 1099-K may not directly reconcile to the monthly processing statements. The statements reports are “net,” while Form 1099-K reports gross for IRS accounting purposes. Therefore, chargebacks, refunds and credits will be included in the reported amount. Additionally, cash-back transactions will also be included in a merchant’s gross amount. If merchants have additional questions regarding this new regulation and how it may impact them and their business, they should seek advice from a tax professional.
Additional information is available at the IRS website, www.irs.gov
For additional questions on W9 Validation, please call us at 800.654.9256