Receipts on Form 1099-K

Business owners may have received IRS Form 1099-Ks from most of the Payment Processors used during 2018. The Form 1099-K reports the gross proceeds received from Payment Processors, over the course of the year, which includes credit card companies, PayPal, Square, and similar organizations.

The Form 1099-K was created as a tool for the IRS to find taxpayers who are earning but not reporting income.  However, there would likely be few circumstances where the amounts reported on 1099-K for any business exactly matches the gross receipts reported on its tax return.

Therefore, the receipt of Form 1099-K likely raises the question of how best to report this information to the IRS on the business tax return. Because gross amounts are reported on this form, they will include all items related to a sale transaction, including sales tax and gratuity, which may not constitute income to the business.

An additional complication to this process involves the reporting requirements themselves: Not every Payment Processor will be required to provide a Form 1099-K. Compliance is only required when the Payment Processor has, for a specific retailer, more than $20,000 in sales and more than 200 transactions. A single transaction of more than $20,000, or more than 200 transactions totaling less than $20,000, may result in the restaurant owner not receiving a Form 1099-K from the Payment Processor in question.

Owners should report gross receipts on their tax return as they have in the past – resisting the urge to match what the Form 1099-K lists as gross receipts.  Credit card gross receipts reported on the Form 1099-K, less taxes and tips and other non-income payments, should equal the credit card gross receipts reported on the tax return.  This, plus any cash sales, should equal the total gross receipts reported on the return.

Owners should also keep accurate records to support the gross receipts included on their annual return.   While the amounts and transaction dates may not tie exactly to the 1099-K, the total should be within reasonable proximity to the total included in the restaurant owner’s books.

Finally, the IRS has indicated they are aware of the special circumstances for businesses, where the amounts reported on the Form 1099-K will include items that do not constitute income to the business. They understand that discrepancies between the tax return and Forms 1099-K are often explainable. However, if there are large discrepancies, the IRS may ask for more information from the taxpayer to support these differences. Therefore, having the information readily on hand to support claimed income will minimize the burden of response, should the business owner receive such a request.

Posted in IRS, Taxes