Third party payment processors such as Paypal, Ebay, banks, and credit card companies have to send a 1099-K form to the IRS and to customers, reporting on those customers’ transactions for the previous year. The 2011 1099-K went out in January 2012, and breaks down payments received and sent on a monthly basis. The requirement of this kind of accounting and data will have a few impacts on small business finances, especially in terms of how small business owners have to craft their tax return strategy to effectively address the new document.

The 1099-K forms looks relatively straightforward. The copy that small business owners will receive just presents the data about payments in gross and broken down by month, as well as the usual information about the merchant and the payment settlement entity (PSE), meaning the payment processor. This copy is sent so the merchant knows the values that the PSE will be reporting and can accurately entire them into the corporate tax form. And this value won’t actually impact taxes due until 2013. So from that perspective it shouldn’t be that worrisome.

However, there are a few caveats. There will be a new line on corporate tax forms for the business owner to enter “merchant card and third-party payments received” just below the familiar income boxes. This just explicitly separates such payments from other income to make it explicit. Most importantly, the merchant needs to remember to deduct the value of fees, state sales tax, cash back amounts, and anything else that reduces the actual amount of income from the number entered in this new field. This isn’t the easiest thing to do as many merchants were not aware of the 1099-K early in 2011, and thus may not have all the data necessary to fully make these reductions. Getting these two numbers right – the actual amount received and the income value taken from those payments, is the bulk of the work that business owners must do to accommodate the 1099-K.

One last thing that relates to the 1099-K is that every business owner should make sure each of his PSE or other payment processing gateways has accurate information for that merchant, including the Tax Identification Number (TIN) and business address. Any recipient of online payment transfers who fails to provide this data, thus inhibiting 1099-K form use, will be subject to a withholding percentage for transactions in 2012 to cover undocumented income that doesn’t get taxed as a result. Adjusting to the 1099-K shouldn’t be that difficult for those who are already on top of their books and keep meticulous records. However, for any businesses that didn’t worry so much about some of these details, it might present a big problem come tax day without appropriate accounting and tax information help.

The 1099k Form Has a Specific Job. Knowing That and Being Prepared for It Can Enable Small Business Owners to Adapt Effectively. Learn More at www.outright.com .