IRS Form 1099-K reports income from third-party network transactions to the Internal Revenue Service and to merchants. It must be received by merchants by January 31 for the previous year.
Third-party transactions are those in which another entity exists between the buyer and the seller. Most are network (online) transactions, and the third party is referred to as a payment settlement entity (PSE).
What Is IRS Form 1099-K?
The IRS requires a payment settlement entity to report payments made to merchants so the payment income can be verified. The IRS has indicated that third-party information reporting has increased tax compliance and has improved collections and assessments within IRS, thereby reduce the tax gap.
There was a lot of unreported income by businesses at one point, and the IRS began using this form to check transactions against what's reported as income on business tax returns. The IRS refers to the difference as the "tax gap." Many merchants weren't reporting income from credit or debit card transactions because there was no way to verify this 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 as Form 1099-MISC and other 1099 forms. The PSE must send a copy of Form 1099-K to the IRS and a copy to the merchant, just as they would with other information statements. The merchant then has a strong incentive to report the same amount of income to the IRS.
The deadline for reporting to the IRS and the merchant is February 28 of the year following the transactions. The deadline for e-filing 1099-K forms is April 1 of the following year.
Who Uses Form 1099-K?
Many eBay sellers use PayPal, which is a PSE for 1099-K purposes. PayPal must send business customers a 1099-K showing the amount of sales transactions for its services.
Your business might receive a 1099-K if:
- You received any payments from payment card transactions, such as debit or credit cards or stored-value cards like gift cards, or
- You received third-party payments other than payment card transactions in excess of $20,000, and if there were more than 200 transactions.
A PSE must use the 1099-K form for all "reportable payment transactions," including those using a credit card, a debit card, or third-party transactions such as PayPal.
What Is a Payment Settlement Entity?
A payment settlement entity is any entity that makes payment in settlement of a payment card transaction or a third-party network transaction. PSEs can take one of two forms:
- Merchant acquiring entity: This is a bank or other organization that has a contractual obligation to make payment to participating payees in settlement of payment card transactions.
- Third-party settlement organization: This is the central organization that has the contractual obligation to make payment to participating payees of third-party network transactions.
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.
What to Do If You Receive a Form 1099-K
Merchants should receive one or more 1099-K forms from their 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 appear on this form because they're reductions in income to your business.
Contact your payment processor immediately if you notice discrepancies. There will be a difference between what your business reports as income and what the payment processor reports if the differences aren't adjusted, and this can be a red flag for the IRS.
Put the 1099-K forms with your business tax file and give them to your tax preparer after you've reviewed them. The forms should be included in your business tax filing with Schedule C, or other income tax filing reports for your business type.
What to Do If You Receive an IRS Notice
The IRS sends notices to businesses whose reported incomes don't match the incomes reported on their associated 1099-K forms. Contact your tax preparer immediately if you receive such a notice. Work with them to review the situation and to complete any worksheets that might be required.
Gather tax records that can help you address the differences. It might be that you had adjustments to income, like returns or chargebacks, that would support your version of the discrepancy. You might not have to file these records with your tax return, but you'll 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 to file your return if you can't comply with the due date. Contact the IRS at the address on the notice if you have questions.
Requirements for Reporting
You'll be asked to give information about your business, including your taxpayer ID, when you sign up with a payment processing service. You could be subject to backup withholding on the transactions processed if you don't provide this ID number, or if the number your provide is incorrect.
- IRS Form 1099-K reports third-party network transactions to the IRS and to the merchants that have received income from these transactions.
- These transactions commonly include income received from entities like PayPal or through debit or credit card purchases.
- These entities are “third parties” and they're often referred to as payment settlement entities or PSEs.
- It’s important to check any 1099-K Forms you receive carefully to make sure they’re accurate, because the IRS will use them to compare these figures to the income you report.