What you need to know about the PA 1099-K audit
Are you confident that your business is keeping good financial records for sales and Use tax? Perhaps you are worried about paying the right taxes when you should be? Our advice is to review how you are collecting, reporting and remitting your sales tax because the state is reviewing sales and Use tax through audits that use your 1099-K audit. The state is concentrating on cash receipts to see if you are reporting taxable transactions accurately.
Some of our customers are facing hefty fines because they are not documenting sales and paying taxes correctly. Below we explain the audit, how Use tax applies, and ways you can survive a sales and use tax audit.
What is the state looking for and how does the 1099-K come into play
To begin we should let you know that the state is conducting audits to check and see if businesses are reporting all their taxable receipts for sales tax purposes. The state is specifically looking at cash transactions. It is important to note that this also relates to what kind of taxes are then paid. The audit refers to the 1099-K form that the state is using to review credit card transactions at the end of the year. Here is a breakdown of the audit and taxes.
Pennsylvania law requires registration for specific tax accounts. This allows you to know what taxes you are liable to collect and remit. This includes employer and employee payroll liabilities and sales and Use taxes. So how do cash sales apply?
One of the main objectives of the audit is to make sure you are reporting all your taxable cash sales. This goes without saying that the state is also checking to see if you are paying taxes correctly. The state is comparing your credit card transactions reported on Form 1099-K to your total sales on your tax returns. They believe your cash sales should be a certain percentage of your total sales depending on your business’s geographic location. The state will be able to confirm or discredit your reporting by comparing transactions to the totals reported on the 1099-K(S) to your accounting records. Then the state is comparing this to the amounts deposited into your bank account.
Your credit card processing company is required to submit a 1099-K for your business if there are 200 recorded transactions totaling at least $20,000 (requirements and limitations vary depending by state). If a 1099-K form is filed, you will receive a copy by the end of January and the IRS will receive a copy by the end of February.
Defining Use tax vs. sales tax
Use tax is due when your business purchases something that is taxable, but sales tax is not charged. It is your responsibility to pay the sales tax in the form of Use tax. This occurs frequently when purchases are made online or from another state. Another state might not charge you sales tax if you make out of state purchases, but it is still your responsibility to pay the tax.
Sales tax is a state-controlled tax paid on qualifying purchases. The tax in Pennsylvania is 6 cents on each dollar spent. If sales tax is not paid on the four below purchase types, a Use tax is applied. Also, if another state’s tax is below 6 cents, businesses purchasing in Pennsylvania are required to pay the remaining tax balance that is due.
Here are the four purchase types for Use tax defined by the PA DOR:
- Over the internet transactions
- Transactions made through toll-free numbers with area codes; 800, 888, 867, and 877
- Mail order catalog purchases
- Transactions from out-of-state if sales tax is not paid or less than Pennsylvania
For more information, check out our beginner’s guide to PA sales and Use tax. The Department of Revenue brochure is also helpful.
Minimize your risk
Here are our recommendations for you to minimize your risk of penalties with the 1099-K audit.
- Keep extensive detailed records of your sales. Use a point of sale (POS) system or an accounting software to keep receipts and any related documentation for payments of goods or services. If you receive cash sales, report them as such.
- Hire a CPA to make sure that your business sales are reported accurately. Our experts can make sure that your books are both organized and that you are paying tax when it is due.
Again, the state is already conducting these audits using the 1099-K. Inconsistent records will result in fines because you do not have proof that you have recorded sales properly or paid the necessary taxes.
If you are unsure about what steps you should take moving forward for the 1099-K audit, speak to one of our CPAs. We can help guide you through the entire process. If you have additional questions, visit the IRS website regarding the 1099-K form.