Sarah is the owner of Pawsome Petsitting, a local pet-sitting service. She recently had a massive wake-up call when a new customer booked a large pet-sitting package using a stolen credit card.

When the real cardholder noticed the charge, the credit card company flagged the transaction as fraudulent and issued a chargeback. Sarah was shocked. Not only did she lose the revenue and have to pay a chargeback fee, but she also realized her business was vulnerable to fraudsters testing out skimmed or stolen credit cards.

The Hidden Complication: Fraud and the New 1099-K Threshold

To make matters worse, Sarah realized this fraud incident could create a tax nightmare. Recently, the IRS announced a lower 1099-K reporting threshold for businesses that process credit card transactions—dropping it down to just $600.

Because payment processors report gross volume to the IRS, the fraudulent charge meant Sarah’s reported income was artificially inflated. If she didn’t track the chargeback and refund in her accounting, she could end up owing taxes on money that a fraudster stole. This made Sarah realize that preventing credit card fraud wasn’t just about protecting her immediate revenue—it was about protecting her tax liability, too.

Assessing the Risk: Finding the Vulnerabilities

Determined to protect her business, Sarah began by auditing how she accepted payments. She contacted her payment processor, Square, to ask about their security measures. While she was relieved to learn they use end-to-end encryption, the support representative pointed out that manually typing in card numbers or swiping older magnetic stripes carries a higher risk of processing skimmed or stolen cards.

Implementing Security Measures: EMV Readers and Employee Training

To mitigate the risk of processing stolen cards, Sarah implemented several new security measures:

• Upgrading Hardware: She replaced her older swipers with modern EMV chip-enabled and tap-to-pay card readers, which are significantly harder for scammers to bypass with counterfeit cards.
• Fraud Monitoring: She enabled advanced fraud-alert filters within her payment processing software that flag suspicious transactions—like multiple failed payment attempts in a row.
• Employee Training: Sarah trained her staff to check for ID on unusually large, first-time, in-person bookings, and to never bypass the chip reader if a card was acting glitchy.

Responding to a Fraud Incident: What to Do and What to Expect

When a potential fraud incident occurs, acting quickly minimizes the damage. Because of her experience, Sarah now has a clear plan in place. If a suspicious transaction goes through, she immediately contacts her payment processor to report it and void the charge before a chargeback is initiated. She also works closely with her accountant to ensure that any refunded or voided fraudulent transactions are properly deducted from her gross 1099-K income.

By investing time and money into better security measures and accounting practices, Sarah is now confident that Pawsome Petsitting is now well-equipped to handle the realities of digital payments.

If you’re a small business owner who processes credit card transactions, it’s essential to protect yourself from both the financial and tax-related consequences of fraud.

By taking a proactive approach, you can protect your bottom line and keep your small business thriving.