Purpose of Reporting
The IRS believes that many online sellers fail to report their transactions. Some don't report because they mistakenly believe that
Internet sales are invisible. Others do so because they are trying to
evade taxes.

The IRS has found that using information returns, such as W-2 forms for employees, Form 1099-MISC for independent contractors, and Form 1099-INT for bank interest, goes a long way toward improving the
reporting of income. IRS computers can match income reported on these
information returns with the income reported on tax returns.

Who's Subject to Reporting
All merchants who accept payments through credit cards, debit cards, gift cards and PayPal will receive information returns telling them -
and the IRS - the gross amount of the merchant card transactions. This
will be broken down month by month. While the form uses the word
"card," the IRS has made it clear that this is interpreted broadly to
include third-party network transactions (i.e., PayPal).

Exception: Very small merchants won't be issued information returns. "Small" for this purpose means annual gross sales on merchant cards of no more than $20,000 or 200 or fewer transactions.
In other words, reporting is required only if gross amounts for the
year exceed $20,000 and there are more than 200 transactions.

Mechanics
As it now stands (proposed regulations have not yet been finalized), gross amounts reported for merchant transactions do not take into
account any adjustments for credits, cash equivalents, discount
amounts, fees, chargebacks, refunded amounts, or any other amounts. It
will be up to sellers to report on their returns the full amounts
reported to them and then make adjustments or explanations to account
for differences in what is ultimately taxable to them.

For example, a seller who is paid $1,000 by credit card for a particular transaction does not necessarily have $1,000 profit even though $1,000 will be included on Form 1099-K. The $1,000 must be
reported so the return will match what's in the IRS computers, but this
amount will then be reduced on the merchant's return by the cost of
goods sold (what it costs for the inventory sold), merchant account
fees, and other costs.

Providing Your Tax ID Number to Processors
Merchants will have to provide their federal tax identification numbers to the companies processing their transactions. If they fail to do so,
they may become subject to "backup withholding," which means these
companies will have to deduct and withhold income tax from reportable
payments. Backup withholding won't go into effect until 2012.

Sellers who don't wish to provide their social security number to payment processors can obtain an EIN (Employer ID Number). Note that you can obtain an EIN even if you are a sole proprietorship. See the
IRS website for more information.

More information on Form 1099-K
You can find more information about Form 1099-K, the new information return that payment settlement entities will use to report the gross
amount of merchant card or third-party payments, on this IRS web page (PDF format).