Section 6050w of the IRS tax code enacted by the Housing Assistance Tax Act of 2008 took effect on January 1, 2011 and requires payment processors to report merchant income to improve tax compliance by businesses that accept credit cards.
Processors must report all settled payment card transactions under section 6050w. And they must perform backup withholding at a rate of 28% beginning in 2012 for merchants that have incorrect TIN or tax filing names.
Make sure your processor has your correct TIN and tax filing name.
Quick Note: The information herein does not replace the advice of a qualified tax professional. Talk to your accountant about the impact of 6050w and your responsibilities under the new tax law.
- Section 6050w Overview
- 6050w Reporting Requirements
- Merchant Reporting
- Merchant Responsibility — What you need to do
- Backup Withholding
- 6050w Threshold & Exemption
- Processor Fees
Section 6050w Overview
Uncle Sam wants to make sure he’s getting the complete story on your credit and debit card charges, so he’s having your processor report your sales directly to the Internal Revenue Service.
The reporting mandate of section 6050w took effect on January 1, 2011, and in the words of the IRS, "… section 6050W … require[s] payment settlement organizations to report payments in settlement of payment card[s] for each calendar year." — Internal Revenue Service — Final rule.
In other words, your credit card processor is going to send a 1099-K report to the IRS every year declaring your gross payment card sales.
6050w Reporting Requirements
The burden of reporting is on payment settlement organizations, so you don’t have any reporting responsibility under the new law.
However, you do need to ensure that your merchant account service provider has your correct tax identification number and tax filing name so that they can accurately report to the IRS. There’s more on this later in the merchant responsibility section.
There are two types of financial institutions required to report your sales to the IRS under section 6050w: payment settlement organizations and Third party settlement organizations (TPSO).
If you really want to learn about merchant acquirers, payment settlement organizations, and electronic payment facilitators, First Data has a nice summary in their overview of 6050w. But knowing all of the players isn’t necessary for understanding 6050w.
Payment Settlement Organizations
Think of your merchant service provider as the payment settlement organization.
Your merchant service provider must send you a 1099-K form by January 31st that shows your gross payment card sales (total dollar amount without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts) for the prior tax year.
Your merchant service provider must send a corresponding 1099-K form to the IRS by March of the same year referencing your business by tax identification number and tax filing name.
Some states want to see the federal reporting information, too. So, your merchant service provider will also report to your state if your business files taxes in New York, Hawaii or California. And there’s an added bonus (insert sarcasm) if your business is based in California.
California is tacking on an additional 7% to any necessary backup withholdings. More on this later.
Third Party Settlement Organizations
Third party settlement organizations, such as PayPal, have different reporting requirements under section 6050w.
They don’t have to report your sales if you have less than 200 transactions or $20,000 in gross sales in a calendar year.
Internal Revenue Bulletin: 2011-23 specifically says, "Payments made in settlement of third party network transactions, however, are required to be reported only if the amount to be reported exceeds $20,000 and the aggregate number of transactions exceeds 200 with respect to any payee within a calendar year."
You can check out PayPal’s information on 6050w here.
Per the IRS, "All payments made in settlement of payment card transactions are required to be reported under section 6050W." — Internal Revenue Bulletin: 2011-23
Reported volume includes credit, signature debit, pin debit, electronic bank transfer (EBT), and certain gift card transactions.
You must ensure that your tax identification number (TIN) and business filing name that your merchant service provider has matches those at the IRS. If they don’t, your provider won’t be able to accurately report your sales, and you will be subject to backup withholding beginning in 2012. This is a mess that you don’t want to deal with.
Most merchant service providers will contact their merchants with incorrect information. For example, here’s what Wells Fargo has posted regarding 6050w. Check your provider’s web site, or the first page of your merchant service statements for information on 6050w reporting.
You can verify that your information is correct with American Express under the "Account Information" section of your Online Merchant Services panel.
Backup withholding will happen if your merchant service provider doesn’t have your correct tax identification number and business filing name. If they do, you will not be subject to backup withholding.
- Per the IRS, your merchant service provider must support withholding of settlement dollars based on withholding guidelines which are currently at 28%.
- California businesses will have an additional 7% withheld by the state.
- Your provider doesn’t get to keep backup withholding. They are required by law to submit all withholdings to the IRS.
- Backup withholding can’t be refunded by your provider, they can only be refunded by the IRS after you file your Federal tax returns
6050w Threshold & Exemption
A threshold exists that applies only to third party settlement organizations (such as PayPal) for merchants who process less than 200 transactions or $20,000 in volume in a given year. It does not apply to the settlement of payment card transactions, for which there is no threshold.
Third party settlement organizations regarding backup withholding:
"…a payment made by a [third party settlement organizations] TPSO is … potentially subject to … backup withholding only if the payee has received … more than 200 transactions within a calendar year." — Internal Revenue Bulletin: 2011-23
"The monetary threshold of $20,000 found in section 6050W is not considered for purposes of determining backup withholding obligations." — Internal Revenue Bulletin: 2011-23
Payment settlement organizations regarding backup withholding:
"Payments made in settlement of payment card transactions that are potentially subject to section 3406 backup withholding have no limiting threshold." — Internal Revenue Bulletin: 2011-23
The reporting mandate under section 6050w does create additional administrative costs for merchant service providers that now must track, report and perform backup withholding when necessary. So, you shouldn’t be surprised to see a new monthly or annual fee imposed by your merchant service provider.
With that said, there will be those processors that inflate the actual administrative costs of 6050w and tack on credit card processing fees that are disproportionate to actual expenses.
Fees associated with 6050w are going by many names. Look at the first page of your processing statements to see what your merchant service provider is charging, and what they’re calling the fees. Here are some examples of the fees that we’ve thus far:
- TIN/TFN Blank Fee
- TIN/TFN Invalid Fee
- TIN/TFN Non-compliance Fee
- administrative fee
- Regulatory Product Fee – (First Data)
- IRS Reporting Fee
- IRS Regulatory Fee
- IRS Non-Compliance Fee