How To Make Sure Your Credit Card Sales Are Reported To IRS

Posted on March 14, 2014

Page 1 of 2

Jeff Brodsly, CEO of Chosen Payments.
Jeff Brodsly, CEO of Chosen Payments.

By Jeff Brodsly, CEO of Chosen Payments

Pay attention…..It’s not spam, it’s not junk mail, its important communication that if ignored could cost you 28% of your gross credit card sales! If you have not heard of “Backup Withholding” or “TIN Mismatch”, this is a must read!

The IRS has come up with ways to ensure merchants are not cheating them out of their piece of the action, mainly by having credit card processors report your sales directly to Uncle Sam.

The Housing and Recovery Act of 2008 included Amendment 6050W, Merchant Tax Reporting.  The purpose of this Amendment is to encourage accurate tax reporting.  The Amendment requires all merchant service providers to collect and verify Taxpayer Identification Numbers (TIN) and report annual gross payments processed by credit or debit cards using Form 1099-K to the IRS and to merchants.

Why Is This Important to Know?
For those merchants who have not provided a valid Taxpayer Identification Number (TIN), address, and name match to their merchant service providers, they will have backup withholding imposed upon their merchant account, which can put some limo operators out of business.  

What is Backup Withholding?
Backup withholding is a type of withholding imposed by the IRS for federal taxes on certain types of investments and incomes sources. Fundamentally, it is similar to the income tax withholding done on an employee’s paycheck. Now, however, the IRS has added another prong to backup withholding. Many merchants will be affected and we want to educate the ground transportation industry on how to avoid this painful experience.

What Happens If You Overlook This
Merchants who overlook or refuse to match up Taxpayer Identification Numbers may face an automatic 28% backup withholding deduction from their merchant account deposits. Consequently, a merchant may not get access to the withheld funds until the following year, so even a small oversight or temporary non-compliance could lock up vital funds for a long time.

On top of the Federal 28%, some states may impose their own penalty. In California, the state assesses a separate 7% withholding penalty, which means that some merchants may see up to 35% of their money tied up. Not sure about you, but if 35% of my gross sales were held up, that would not be a fun time for me!

One additional concern is that credit card transactions could become subject to backup withholding or garnishment if a business becomes delinquent on their tax payments. This withholding process could leave a business in severe financial difficulties.

How to Protect Your Business
Fortunately, you are still safe, according to the recent publications by the IRS, especially if you process with First Data (the world’s largest processor). I am one of a small group of individuals that sits on the First Data ISO Advisory Board, so I keep up to speed with all things major such as this. The deadline to impose this penalty for most card brands has been pushed back until October 2014 (originally slated for 2012) and the burden of reporting is on merchant service providers, so you don’t have any reporting responsibility under the new law.

However for some merchants who process direct with American Express we have already seen this process started and funds withheld. Simply put, if your TIN is not valid by October 2014 you will start to get your revenue withheld.
However, it is your responsibility to ensure that your merchant service provider has the correct full legal name of your business, your address, and taxpayer identification number so that they can accurately report it to the IRS. For most businesses, this would be your Employer Identification Number (EIN). Due to this, merchant service providers will likely request that businesses provide them with a Form W-9 to acquire this information.  You can prevent the backup withholding tax from being applied to you by making sure that you fill in your correct TIN on your W-9 form. Be proactive when it comes to this requirement — especially since the financial consequences of non-compliance could be significant.

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