If you are in Business for your self, either part time or full time, you most likely accept credit cards as a form of payment. It cost a little more than taking cash but its worth it making it convenient for your clients to pay you easily. Even if you don’t take credit cards directly many of us use third party services such as Paypal to take payment for services or products we have to offer.
Well a new section to 6050W of the IRS code will have credit card service providers (your merchant account) to report all your transactions to the IRS. This also applies to third party processors such as Paypal, although if I read it correctly this will only apply to those that collect more than $20,000 a year with those such as Paypal. The are doing this to hopefully catch those that under report their earnings and collect more taxes. There are some other concenquenses to this section that you should be aware of even if you do report your income properly.
Everything the government passes ends up costing you something. This new requirement will be no exception! This increase reporting burden on the merchant providers will cost them a good chunk of change. Some Providers have all ready reported that the have already had to create all new reporting systems/software. Also means new employees and departments… You think they are going to just eat the costs? Again some have already said their monthly fees will be increased to cover the costs. Don’t know how Paypal will do it as they don’t charge a monthly fee currently, will have to wait and see on that one.
28% Withholding Penalty
The biggie is if something docent seem right, like your information with your merchant provider doesn’t match up exactly with the IRS records, the provider will be required to withhold 28% of you income until the information is corrected! Think you will get that money back as soon as you do? Try again, you will not get the money back until the following tax year and only as a tax credit. Now if you are like me and use a merchant account AND Paypal just think if this happened and they both had to withhold. Thats a big chunk of your income tied up for a year, that could break some businesses!
What to do
This was supposed to take effect on Jan 1st but the IRS has extend the start till Jan 1, 2013. So this next year check with your merchant account and Paypal (or any other payment processor you may use) and be sure all the information is correct. Business name, EIN and SSN, make sure they match with what you use to file your taxes. If your provider asks for information this next year to update their records, don’t hesitate and take care of it right away!
Personally I feel the penalty is a little draconian and needs to be changed so maybe we can write our congress people and see about getting a little adjustment done here. I mean at the very least the penalty money should be released by the processor once everything is correct. Holding it for up to a year and only releasing as a tax credit is just wrong. The way the government needs money they may ‘find’ lots of things ‘incorrect’
Do you take credit cards? what do you think of the changes?