Complying with the IRS Reporting Rules
Starting with the 2011 tax year, the Internal Revenue Service (IRS) implemented a change to the tax code requiring all merchant acquiring entities, such as Clearent, to file a Form 1099-K each year to report their merchants' payment card transactions.
Since these regulations can be confusing, we've compiled a list of common questions to help you understand the ins and outs of the 1099-K and backup withholding and how the Regulatory Reporting Program from Clearent can help.
Have questions about your 1099-K? Learn more about the information that's included here.
REGULATORY REPORTING PROGRAM
What is the Regulatory Reporting Program?
Clearent merchants are automatically enrolled in Clearent's Regulatory Reporting Program, which makes it easy for businesses to comply with reporting mandates from the IRS and the card brands.
What do I need to do?
All you need to do is make sure that we have your business' correct Taxpayer Identification Number (TIN) and legal name. Your TIN is either your Employer Identification Number (EIN) or a Social Security Number (SSN). By ensuring that we have your correct information now, you won't have to worry about the IRS withholding your sales or the card brands charging additional fees. And when it's time to do your taxes, we will provide you with an annual activity report that includes all your returns, chargebacks and fees to save you valuable time.
What are the IRS requirements?
The IRS has a form called a 1099-K, Payment Card and Third Party Network Transactions. This form is filed annually and reports each merchant's payment card transactions for the calendar year. Form 1099-K must include the transactions for each Taxpayer Identification Number (TIN), including all merchant accounts associated with that TIN. In January of 2012, merchant acquirers were required to start providing this form to merchants and the IRS.
The IRS requires a valid business name and TIN for each merchant. If merchant acquirers do not have a valid business name and TIN, the IRS will require acquirers such as Clearent to start backup withholding, at a current rate of 24% of gross sales, beginning in November 2014.
Does Form 1099-K apply to each merchant account or business name?
The IRS requires merchant acquirers to report by each business' Taxpayer Identification Number (TIN), meaning its Employer Identification Number (EIN) or Social Security Number (SSN). The TIN is associated with the business' legal name, the name used for its tax return. If a business has more than one merchant account (MID), then the Form 1099-K will combine the activity across multiple accounts.
What do merchants need to do?
Merchants need to make sure their merchant services provider has accurate tax information, including the legal name of the business and TIN.
How do Clearent merchants update their tax information?
If you are a Clearent merchant and have been contacted by us stating that we have an invalid business name and TIN for your account, please download and complete a W-9 form. Return it to Clearent via mail at the address listed at the bottom of the form, fax it to 314.721.7300 or email it to email@example.com.
Where can I find my tax information?
Your name and TIN should match those used on your tax return in order to match the IRS database. If you filed for a federal EIN, you should use the EIN and business name from the IRS EIN letter (notification CP 575 A), which the IRS used to assign an EIN to your business.
What if my account is closed?
Even if your account is closed, merchant acquirers are required to report any transactions for the calendar year. This is why we need your accurate tax information. If you switched providers during the year, you likely will receive a 1099-K from each acquirer.
What is backup withholding?
If merchant acquirers do not have a valid business name and TIN, the IRS requires acquirers such as Clearent to start backup withholding, at a current rate of 24% of gross sales. This means that Clearent must withhold 24% of the merchant's daily deposit and transfer these funds to the IRS.
What is a ‘B’ notice?
If the IRS determines that a merchant has an incorrect TIN, Clearent is required by the IRS to mail the merchant a ‘B’ notice, which is a notice of backup withholding. Accompanying the ‘B’ notice will be a Form W-9, Request for Taxpayer Identification Number and Certification. The merchant should complete the W-9, making sure it matches his EIN letter and tax return. The W-9 should be returned to Clearent immediately so that the merchant's account can be updated.
When are ‘B’ notices sent to merchants?
‘B’ notices are typically sent in September or October each year. Only those merchants who have incorrect TINs will be contacted at this time.
When are processors required to start backup withholding?
Merchants who receive a ‘B’ notice from Clearent must complete the enclosed Form W-9 and return it to Clearent immediately. If Clearent does not receive a completed W-9 by the specified date on the ‘B’ notice, Clearent is required to begin backup withholding. Once Clearent receives a completed W-9, we can stop backup withholding.
What happens to money that is withheld?
Processors such as Clearent do not hold the money. The money is transferred to the IRS. This means that merchants will not have access to this money until they file a tax return the following year and potentially get a refund.
Will merchants be able to see how much money has been withheld?
If a merchant is subject to backup withholding, he will be able to see the details and exact amounts on both his monthly merchant statement and on Merchant Home in Compass.
Are small merchants exempt from the IRS reporting requirements?
No. You may have heard that reporting is only required if a business has more than $20,000 in sales, but that is not true. That exemption only applies to payees of ‘third party networks’, such as PayPal, if they process less than $20,000 or fewer than 200 transactions. The exemption does not apply to payment card transactions through traditional merchant accounts.
Do the IRS reporting requirements apply to government agencies?
Yes. The IRS 1099-K reporting requirements include “any person, including any governmental unit who accepts a payment card”. However, most government agencies are exempt from backup withholding per section 3406(a) of the Internal Revenue Code.
Do the IRS reporting requirements apply to non-profit organizations?
Yes. The IRS 1099-K reporting requirements include non-profit organizations. However, tax-exempt organizations such as charities are exempt from backup withholding per section 3406(a) of the Internal Revenue Code.
Do the IRS reporting requirements apply to cash advance transactions?
Cash advance transactions are exempt from the rules, so acquirers do not have to report (or backup withhold) for bank cash advance branches.