February 21, 2013, 11:44 AM
By Paul Demery Chief Technology Editor
Small online retailers are getting to know the 1099-K form, a document filled out by payment processors and used by the Internal Revenue Service to verify retailers’ reported incomes.
Introduced for the 2011 tax year, the 1099-K form was designed to help the IRS enforce income reporting by small businesses, including the thousands of retailers that sell through online marketplaces, says Mark Luscombe, principal tax analyst for CCH, a unit of Wolters Kluwer that provides tax and business information. “The 1099-K is an effort to use information from third parties to increase compliance,” he says.
Section 6050W of the Internal Revenue Code requires “payment settlement entities”—such as processors of Visa and MasterCard payment card transactions and payment services like eBay Inc.’s PayPal and Google Inc.’s Google Wallet—to report the total annual value of transactions processed for each client retailer on a 1099-K form prepared for each client. Payment processors send 1099-K forms for each client to both the client and the IRS. If a retailer receives payments through three payment processors, it will receive three 1099-K forms, one from each processor, the agency says.