Starting this year, there is a new Form 1099 reporting requirement for certain entities. Payment Settlement Entities (PSEs) are required to report certain transactions on Form 1099-K. The forms are due to merchants by Jan. 31, and to the IRS by either Feb. 28 or April 2, depending on whether the form is filed in paper or electronic form. Form 1099-K is for reporting credit card payments and certain other financial transactions so that the IRS can track internet transactions and better administer the tax code. The addition of this filing requirement was part of the Housing Assistance Tax Act of 2008.
Form 1099-K is the way to report transactions required under I.R.C. § 6050W. This code section requires each PSE to report every year the gross amount of reportable payment transactions and the identifying information of the participating payee.2 A PSE is defined as “merchant acquiring entity” (in the case of a payment card transaction), and a “third party settlement organization” (in the case of a third party network transaction).3 A merchant acquiring entity is a “bank or other organization which has the contractual obligation to make payment to participating payees in settlement of payment card transactions.”4 A third party settlement organization is a “central organization which has the contractual obligation to make payment to participating payees of third party network transactions.”5 A participating payee is any person who accepts a payment card as payment, and any person who accepts payment from a third party settlement organization in settlement of a transaction.
A reportable payment transaction is any “payment card transaction and any third party network transaction.”6 A payment card transaction is “any transaction in which a payment card is accepted as payment.”7 A third party network transaction is “any transaction which is settled through a third party payment network.”8 A payment card is “any card which is issued pursuant to an agreement or arrangement which provides for: (A) one or more issuers of such cards, (B) a network of persons unrelated to each other, and to the issuer, who agree to accept such cards as payment, and (C), standards and mechanisms for settling the transactions between the merchant acquired entities and the persons who agree to accept such cards as payment…”9 A third party payment network is “any agreement or arrangement: (A) which involves the establishment of accounts with a central organization by a substantial number of persons who:(i) are unrelated to such organization, (ii) provide goods or services, and (iii) have agreed to settle transactions for the provision of such goods and services pursuant to such an agreement or arrangement, (B) which provides for standards and mechanisms for settling such transactions, and (C) which guarantees persons providing goods or services pursuant to such agreement or arrangement that such persons will be paid for providing such goods or services…”10
There is a threshold to cross before the reporting requirements apply to a third party settlement organization. The required information only needs to be filed once a participating payee has over $20,000 in transactions, or over 200 transactions.11
This law and corresponding Form 1099-K are aimed at helping the IRS track transactions that are made over the internet. This reporting requirement is aimed at payment centers such as PayPal and credit card providers. Businesses that make sales over the internet and accept credit cards and PayPal-like services may be receiving Forms 1099-K this year if they meet the threshold requirements. This extra Form 1099 makes it even more important that the vendor keeps very detailed records of their transactions. It is possible they will be receiving a Form 1099-MISC from the customer, and a Form 1099-K from the PSE. This duplicate reporting could result in a double reporting of income if the payee is not careful.
1Tyler Murray practices tax law at the Denver law firm The Law Offices of Murray & Wright, P.C.
2I.R.C. § 6050W(a)(1) & (2).
3Id. at (b)(1)(A) & (B).
4Id. at (b)(2).
5Id. at (b)(3).
6Id. at (c)(1).
7Id. at (c)(2).
8Id. at (c)(3).
9Id. at (d)(2)(A)-(C).
10Id. at (d)(3)(A)-(C).
11Id. at (e)(1) & (2).