IRS Form 1099-K - What You Need to Know
Reporting Payment Card and Third Party Network Transactions
What is Form 1099-K?
IRS Form 1099-K is used to report income from third-party network transactions. The form is sent by third party payers to merchants. It must be received by January 31 for the previous year. Your business might receive a 1099-K if:
- You received payment from payment card transactions (debit or credit cards or stored-value cards (like gift cards)) for any amount or
- You received third-party payments (not payment card transactions) in excess of $20,000 and if there were more than 200 transactions.
Third-party transactions are those in which there is someone between the buyer and seller. Most are network (online) transactions, and the third party is called a payment settlement entity (PSE). The IRS requires a payment settlement entity to report payments made to merchants so that the payment income can be verified.
Why is Form 1099-K necessary?
The IRS says, "Third-party information reporting has been shown to increase voluntary tax compliance, improve collections and assessments within IRS, and thereby reduce the tax gap."
In other words, there is a lot of unreported income (what the IRS calls the "tax gap") by businesses, and the IRS is using this form to check transactions against what is reported as income on business tax returns.
What is a Payment Settlement Entity (PSE)?
"a domestic or foreign entity that is a merchant acquiring entity, that is, a bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions; or a third party settlement organization (TPSO), that is, the central organization that has the contractual obligation to make payments to participating payees of third party network transactions."
In short, a PSE is a bank that is serving as a merchant for credit or debit card transactions or a third-party payment service like PayPal.
Who must complete and send out Form 1099-K?
The PSE must use the 1099-K form for all "reportable payment transactions;" that is, all transactions using a credit card, debit card, or third party transaction, such as PayPal.
The PSE must send a copy of Form 1099k to the IRS and a copy to the merchant, just like a W-2 or 1099-MISC form. The merchant then has a strong incentive to report the same amount as income to the IRS.
Previously many merchants did not report income from credit or debit card transactions because there was no way to verify the income except by using bank account records. Form 1099-k is filed after the end of the calendar year, for the previous year, the same time as Form 1099-MISC.
Many eBay sellers, for example, use PayPal, which a PSE for 1099-k purposes, and which must send business customers a 1099-k showing the amount of sales transactions for its services.
Do I Have to Register for 1099-K Reporting?
When you sign up with a payment processing service, you will be asked to give information about your business, including your taxpayer ID. If you don't provide this ID number, or it is incorrect, you may be subject to backup withholding on the transactions processed.
What do I do if I Receive a Form 1099-K?
As a merchant, you will receive one or more 1099-k forms from your bank or a third party like PayPal for in-store or online transactions. First, review the forms for accuracy. Make sure that no deductions or adjustments are included.
Returns, allowances, deductions, and chargebacks should not be included on this form, since they are reductions in income to your business.
If you see differences, contact your payment processor immediately. If the differences are not adjusted, there will be a difference between what your business reports as income and what the payment processor reports. This can be a red flag for the IRS.
When you have reviewed the 1009-K form, put it with your business tax file and give them to your tax preparer. The forms will need to be included in your business tax filing on Schedule C or other income tax filing report for your business type.
What if I receive a notice from the IRS about Form 1099-K?
The IRS is sending out notices to businesses whose reported income does not match income reported on 1099-k forms.
If you receive such a notice:
- Contact your tax preparer
- Work with your tax preparer to review the notice and complete any worksheets
- Gather tax records that may help you address the differences. It may be that you had adjustments to income, like returns or chargebacks, that would support your version of the discrepancy. You may not need to turn these records in, but you will need them in case of an IRS audit.
- Submit all required worksheets and other requested information by the due date, or file a request for an extension if you cannot comply with the due date.
- Contact the IRS at the address on the notice if you have questions.
What are Some Concerns About the 1099-K?
Since the announcement about the 1099-k form, businesses have expressed concern over several matters. Of most concern is that the 1099-k reports total purchase transactions for the year and month by month, but without adjustment for returns and allowances, customer adjustments or chargebacks. The retailer must keep track of those separately in order to verify any difference between the total amount shown on the 1099-K.
More on Regulations for Merchant Card Reporting from TheBalance.
More information from the IRS