Small merchants and individuals who sell online will most certainly come across an unpleasant reality sooner or later: the need to provide their taxpayer ID (a social security number or EIN) to any entity that processes payments on their behalf.
That’s because companies that process credit and debit cards as well as third-party network payments such as Etsy, PayPal and Amazon.com are required to report to merchants and to the IRS the gross amount of the transactions they’ve processed.
Every so often, the issue arises as a result of one of these payment-processing firms sending out requests to sellers for their taxpayer ID, and sellers who are unfamiliar with the requirement turn to industry boards seeking information. In mid-December, it was some Etsy sellers who were coming across the requirement for the first time.
Etsy sent out a notice to sellers last month warning them that if they didn’t provide the marketplace with their tax ID numbers, Etsy would be forced to shut off Direct Checkout for their listings – Direct Checkout is the marketplace’s optional checkout system (sellers can choose to use other payment methods).
The Etsy letter to sellers read in part:
“We previously contacted you about collecting a taxpayer ID due to your sales volume so far this year through direct checkout. We are doing this to comply with a new IRS rule that requires Etsy to report sales information, in the form of a 1099-K, for sellers who have reached certain sales thresholds for the year.
Please update your account with this information. Unfortunately, without this information, direct checkout will be turned off in your shop.
This information will be stored with your account and will be used to provide you with a form 1099-K at the end of the year if you end up reaching the gross sales thresholds defined by the IRS.”
Electronic payment processors need only report to the IRS the amount of transactions they’ve processed for sellers who use their services to process 200 or more transactions in a year totaling at least $20,000. Both the volume and revenue thresholds must be met to trigger the reporting requirement (a concept that many sellers have trouble grasping).
Unfortunately, payment processors generally don’t wait for sellers to get close to that level before requesting the information from sellers. Some sellers discussing the issue on the Etsy boards said the marketplace requests the information once a seller reaches 75 Direct Checkout transactions. Once a seller meets both thresholds, payment processors issue a 1099-K form to the seller and sends a copy to the IRS.
Sellers should note that they should never provide personal or financial information through email, even if the request looks genuine. In the case of Etsy sellers, they should log on (not using any links in emails) and go to their account settings or proactively reach out to the marketplace through normal channels.
This January 2013 article is one of many published in EcommerceBytes about the requirement that was passed by Congress in response to concerns over discrepancies between the amount of revenue generated from online transactions and what sellers reported to the IRS.