What You Need to Know About IRS 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 the merchant 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.
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.
What Is a Payment Settlement Entity (PSE)?
According to the IRS: A payment settlement entity is an entity that makes payment in settlement of a payment card transaction or third party network transaction. Payment Settlement Entities are often referred to as “PSEs” and can take one of two forms:
- Merchant Acquiring Entity: A bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions.
- Third Party Settlement Organization: The central organization that has the contractual obligation to make payment 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. 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.
Who Must Complete and Send a 1099-K?
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.
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.
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 Reporting Purposes?
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 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 in 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. It 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 reports for your business type.
What If I Receive a Notice?
The IRS is sending out notices to businesses whose reported income does not match the 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.
The IRS article "Understanding Your Form 1099-K" has instructions if there is a mismatch between the information you have and the information you received on Form 1099-K.
IRS. Understanding Your Form 1099-K. Accessed Oct. 12, 2019.
IRS. General FAQs on Payment Card and Third Party Network Transactions. "Why is this Reporting Necessary?" Accessed Otc. 12, 2019.
IRS. General FAQs on Payment Card and Third Party Network Transactions. "What are Payment Settlement Agencies?" Accessed Oct. 12, 2019.