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The IRS estimates there is a $300 billion a year tax gap, or the amount owed by individuals and businesses versus the amount that is being paid in taxes. In looking to close this tax gap, the government wants to better track business transactions for tax purposes.
Buried deep in the health care reform bill signed into law on March 23, 2010 is new legislation that is going to significantly change the way small business owners handle their finances with new 1099 requirements.
But closing this tax gap has spanned the agendas of the last two presidencies; buried in the Housing Assistance Tax Act of 2008 was the creation of a new tax-reporting form called the 1099-K that individuals and companies must begin using in 2011, signed under former President Bush.
Read below to find out how these 1099 changes may affect you.
The IRS is attempting to improve the voluntary tax compliance of self-reporting income from business owners by tracking their credit card, debit card, third-party transactions, and other electronic payment processing revenues.
If any payment processor has at least 200 transactions per year using a credit card or debit card, and those transactions total more than $20,000, then the 1099-K form must be filled out and sent to their client and to the IRS.
Even though the 1099-K is to track credit and debit card transactions, rest assured that no credit card or debit card confidential information will be furnished to the IRS, and this law doesn’t change whether or not credit card rewards are taxable.
1099s for eBay Sellers. Casual sellers online will not be affected by this legislation because they will not reach the $20,000 and 200 transaction thresholds. However, this new legislation could really shake things up for full-time sellers on eBay, amazon.com, and those who use Paypal as a means to get paid for their services and goods.
Beginning in 2011 eBay sellers must report gross payments on the 1099-K.
In writing this article, I took a glance at several forums filled with people asking all sorts of questions and giving varying opinions about the new legislation, from people believing that it is a much needed tool for the government to be able to tax underreported income earned online, to people (who must be underreporting their income) being a bit fearful and questioning its validity.