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IRS Form 1099-K - What You Need to Know

Reporting Payment Card and Third Party Network Transactions

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What is Form 1099-k?
IRS Form 1099K must be filed by a payment settlement entity (PSE)for payments to the merchant made by credit or debit card or through third party entities like PayPal. According to the IRS, The Housing Assistance Tax Act of 2008, requires a payment settlement entity to report payments made to merchants for goods and services in settlement of payment card and third-party payment network transactions.

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.

Some terminology:
A payment settlement entity (PSE) is "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 IRS requires PSE's like banks and PayPal to report transactions for merchants who have gross sales of more than $20,000 or 200 transactions in a year. Reporting for merchants with less than these required sales and transactions is voluntary, but many PSE's routinely issue Form 1099-k for retailers who have only a few transactions. Form 1099-k is filed after the end of the calendar year, for the previous year, the same time as Form 1099-MISC.

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, as on 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 bank account records.

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.

Issues with 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 charge backs. The retailer must keep track of those separately in order to verify any deviation from the total amount shown on the 1099-k.

What do I do with Form 1099-k?
As a merchant, you will receive one or more 1099-k forms from your bank or third party like PayPal for in-store or online transactions. First, review the forms for accuracy. Then put all 1099-k forms with your business tax file and give them to your tax preparer. The forms will need to be included with 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 charge backs, 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.

 

More on Regulations for Merchant Card Reporting from William Perez, Guide to Tax Planning.

More information from the IRS

IRS Final Regulations on Payment Card Reporting, issued August 10, 2010.

IRS Notices related to Form 1099-K

Merchant Card Transactions FAQ's

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