With the start of tax-filing season, restaurant owners may have received (or should soon be receiving) IRS Form 1099-Ks from most of the Payment Processors they used during 2013. The Form 1099-K reports the gross proceeds received from Payment Processors, over the course of the year, which includes credit card companies, PayPal, Square, and similar organizations.
The receipt of Form 1099-K likely raises the question of how best to report this information to the IRS on the restaurant’s tax return. Because gross amounts are reported on this form, they will include all items related to a sale transaction, including sales tax and gratuity, which may not constitute income to the restaurant. As a result, restaurant owners may be understandably conflicted by not only the need to accurately report gross receipts and sales information on the tax return, but also the desire to not raise any red flags with the IRS.
An additional complication to this process involves the reporting requirements themselves: Not every Payment Processor will be required to provide a Form 1099-K. Compliance is only required when the Payment Processor has, for a specific retailer, more than $20,000 in sales and more than 200 transactions. A single transaction of more than $20,000, or more than 200 transactions totaling less than $20,000, may result in the restaurant owner not receiving a Form 1099-K from the Payment Processor in question.
On a practical level, there are certain things all restaurant owners should, and should not, do relating to these Form 1099-Ks.
Continue to report gross receipts on their tax return as they have in the past – resisting the urge to match what the Form 1099-K lists as gross receipts. The IRS has indicated that income must be reported as stated in IRS form instructions and guidance for the business’ applicable tax return. Deviating from that instruction may result in inaccurate reporting of income, which could, in turn, result in penalties.
Consider reconciling any Form 1099-Ks received. Credit card gross receipts reported on the Form 1099-K, less taxes and tips and other non-income payments, should equal the credit card gross receipts reported on the tax return. This measure can be additionally useful should the restaurant owner receive an information request from the IRS about the amount of gross receipts reported on their annual filing. The reconciliation, plus any cash sales, should equal the total gross receipts reported on the return.
Keep accurate records to support the gross receipts included on their annual return. The Form 1099-K is not intended to be reconciled for the IRS on the tax return itself, so it will be more important the records support the amounts on the return rather than what the Payment Processor indicates on the Form 1099-K.
Owners should not:
Use only the amounts from the Form 1099-K as the gross receipts on the restaurant’s tax return, unless it accurately reflects sales.
Hesitate to contact the issuing Payment Processor if there is a discrepancy. While the amounts and transaction dates may not tie exactly, the total should be within reasonable proximity to the total included in the restaurant owner’s books. There should be a telephone number listed on the Form 1099-K to contact the issuer.
Keep in mind the Form 1099-K was created as a tool for the IRS to find taxpayers who are earning, but not reporting, income. The issue was brought to light thanks to the increase in online sales by smaller retailers. The Form 1099-K attempts to capture enough information to indicate to the IRS who should be reporting income based on gross receipts received through Payment Processors. There would likely be few circumstances where the amounts reported on 1099-K for any business exactly matches the gross receipts reported on its tax return.
Finally, the IRS has indicated they are aware of the special circumstances for restaurant businesses, where the amounts reported on the Form 1099-K will include items that do not constitute income to the business. They understand that discrepancies between the tax return and Forms 1099-K are often explainable. However, if there are large discrepancies, the IRS may ask for more information from the taxpayer to support these differences. Therefore, having the information readily on hand to support claimed income will minimize the burden of response, should the restaurant owner receive such a request.
Learn more about the Form 1099-K as well as other restaurant- and small business-related tax information.
Jim White is a member of Katz, Sapper & Miller’s Restaurant Services Group. For more information regarding KSM’s restaurant-specific services, contact Jim at 317.452.1908 or email@example.com.