I find the following information to be concerning for business owners who accept credit card payments. The company that processes your credit card receipts is beginning to send out Form 1099-K reporting the amount of credit card transactions to businesses and to the IRS. In and of itself, reporting the amount of transactions to the IRS does not bother me. However, what happens or could happen next does bother me.
In addition to reporting the amount of transactions to the IRS, the credit card processor also reports a name and a tax ID number. The IRS has become very good at matching the name and the tax ID number and that is a cause for concern. When you signed up with the credit card processor, you could have very easily and totally innocently created a mismatch of name and number. You may have signed up using your personal name as the business owner instead of the business name while using the business tax ID number. You may have filed for a name change again causing a mismatch. Using a “doing business as” commonly referred to as D/B/A can cause a mismatch. Another possibility is using a close and similar name but not the exact name such as “Company” or “Inc”.
The IRS will notify the credit card processor when a mismatch occurs and ask them to either (1) correct the filing information or (2) begin backup withholding on your payments from the credit card company. Credit card companies are like everyone else – just too busy to contact the business and deal with these mismatches. As a result, they are just taking option 2 and starting to withhold a portion of your proceeds as federal income tax and turning this money over to the IRS. You will get credit for these amounts that have been turned over when you file your tax return. In the meantime, you are operating without these funds coming into your bank account.
The mandatory percentage amount of backup withholding is 28% of the gross proceeds. Your profit percentage is never figured into the backup withholding amount. Take this example. The amount you are due to receive from the credit card company is $1,000. Your profit is $400 or 40%. You are in a 25% tax bracket. Your income tax on the $1,000 gross sale is $100 (25% of the $400 net profit). The credit card company under the backup withholding rules is required to hold back $280 (28% of $1,000). This is almost 3 times the actual tax on the transaction.
I very strongly recommend that you file Form W-9 with all of your credit card processors. Do this immediately so that the credit card processor will have a matching name and number on file before 2018 really gets going. Make sure that the name and federal tax ID are an exact match. Even if you have not had a problem in the past and you are positive that this does not apply to you, there is no harm in filing a Form W-9 with your credit card processor. It is no different than getting a new W-4 on your employees at the beginning of the year which, by the way, I also highly recommend that you do.
A Form W-9 can be obtained from IRS.gov.