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What is IRS Form 1099-K?

E-commerce has seen a boom in the last 5 years, and as it became clear that it was a very worthwhile way to make revenue for businesses, the IRS was struggling to keep with collecting the taxes that should have come their way. While the online sellers and made money, the IRS was losing it with no voluntary tax compliance in sight.

The government wants to know how much money moves through online sales. Hence they passed a law and introduced the 1099-K which allowed them to track the money with the help of websites such as Amazon, PayPal, etc. made.  When any online seller sold a product, sites such as above track all those sales and send the sellers a exhibiting and showing the seller how much he has sold at the end of a particular period. This process uses the Form 1099-K. The seller gets a copy, and in turn, so does the IRS.

Understanding Form 1099-K

The Housing Assistance Tax Act of 2008 says that the Form 1099-K must be filed for payments to the merchant made by credit, debit card or 3rd party entities like PayPal by a payment settlement entity.

Starting January 2011, the IRS requires the reporting of certain e-transactions and payments separately to improve voluntary tax compliance and payment. The 1099-K provides this particular info regarding any of the payments listed below:

  • If you have gotten payments from merchant card transactions (e.g. MasterCard or Visa cards)
  • If you have gotten payments from 3rd party payment settlement networks (online buys) above the thresholds of:
    • Gross expenditures that exceed $20,000, as well as
    • In Excess of 200 such transactions.

All business processing such payments also come under the purview of the Form 1099-K.

Transactions required to be reported by the Form 1099-K

“Payment card transactions” have a very specific definition in the tax code, and all such transactions must be reported under the 1099-K. It includes all stored-value cards, gift cars, debit cards and credit cards.

The form specifically includes the incomes and revenues data for the full 12-monthly year, adding the sub-total for each month too. This means that the gross sales are to be reported, unadjusted for returns or credits, and that too by the transaction date and not the settlement one.

Why must gross sales be reported on the Form 1099-K?

The IRS takes into account the fact that certain businesses or companies might be able to obtain benefits from the probable and potential deductions on these payments such as returns, other fees and charge backs.

Who must file the Form 1099-K?

Filing of the Form 1099-K must be done by the entity identified as the payment settlement entity (PSE) towards 3rd part network and payment via card transactions during the particular year. Simply put, a PSE is a domestic/foreign entity, identified as the “merchant” entity, i.e., the bank or any other organization that has the obligation to make payment during card transactions online. There can be the co-existence of multiple PSEs for the same reportable transaction. In that case, it is the PSE that gives the order to transfer funds that must file the return. However, the other PSE can also file the return if all parties agree in writing.

Additionally, there can be the existence of another party in the transaction called the “Electronic payment facilitator”, who has been designated to make payments by the PSE to settle reportable transactions on its behalf. In such case, the EPF is also supposed to file the Form 1099-K in lieu of the PSE. Payment gateways that appear when individuals pay bills or book tickets can be classified as EPFs. They are also known as the “payment entity”

Receiving Form 1099-K

1099-K is sent to the individual/entity on or before 31st January, 2013 to the mail address where all their regular mail correspondence goes.

The new requirements of the IRS were made accessible via the many publications of the IRS and info was available on the website www.irs.gov as well.

What does the PSE need to do?

The Federal “TIN” (also known as Tax Identification Number) is used to identify different business, much like a social security number for individuals. It is the identification number for businesses, and in most cases is either the employer identification or the social security number.

As a merchant entity, you must see to it that your payment processor has the right legal name as well as TIN on the file. Accurate tax information that matches IRS records will help prevent any hassles during the entire process.

Finding out TIN and legal name

The legal name is generally the business vendor’s or proprietor’s name as presented on IT returns with the SSA, and/or on the Social Security card of the business proprietor; this for individuals or proprietorships.

The legal Name is the name of the business the merchant given on the Form SS-4 to the IRS. If owners are still confused, they can communicate with the IRS to put in a request for the Form 147C, through which he can confirm the info.

If the TIN and legal names of the business/owner are different from that what the IRS has, in that case the merchant is subject to backup concealing from any future payments made.

Refusal to provide legal name and TIN

If the business owner or individual refuses to provide the legal name and Tin for correct filing, then that will lead to an incorrect Form 1099-K to be filed with the IRS. Eventually, the IRS will subject you to the backup-tax withholding mandated by the IRS. This process requires the payment processors to remit such amount specified by the IRS (due from the merchant as tax under the 1099-K) straight to the IRS. Such processes will have a negative impact on the business hence it is prudent to check your records, and provides the IRS with the necessary info required for the correct filing of 1099-K.

Existence of multiple merchant accounts

The IRS mandates that payment transactions for every business with a unique TIN must be filed and reported on separate 1099-K forms. Even If your business has more than one merchant account, the 1099-K bunches up sales for accounts with the same TIN.

What is the significance of the account no.?

The account number is included to assist merchants with their records, and is the number for the merchant account. The IRS, however, is fixated on the TIN and not your account number. If you have two or more merchant accounts with the identical TIN, the 1099-K looks up the merchant number which has the highest sales volume.

Information to be reported on Form 1099-K

The following info needs to be necessarily reported on the IRS Form 1099-K:

  • Gross amount of payment transactions that are reportable on the 1099-K(payment card and third party network payments) made to each contributing recipient sans any adjustments
  • The payee’s name, address and tax ID number.

The dollar amount of each transaction is determined on the date of the transaction.

How to file Form 1099-K?

The 1099-K can be filed electronically through the online system of the IRS, the Fire (filing info returns electronically). The form can also be physically sent on paper to the either the IRS office in Austin or Kansas City, whichever jurisdiction your business falls under. The details of the states under the jurisdiction of both addresses are given on the IRS website.

Reported amount more than settlement amounts

The IRS requires the gross amount, whereas the business sales might be adjusted for refunded amounts, fees, discount amounts, cash equivalents, credits, or any other amounts.

Monthly statements and sales mismatch

The mismatch might occur due to the following reasons:

  • Since the 1099-K form comprises sales from across all of the accounts with the same TIN, the mismatch might occur if the merchant is considering the sales from only one account.
  • Since the IRS reports only gross sales on the Form 1099-K,and the monthly statements report both net and gross sales, the mismatch might occur due to having overlooked the correct amounts to be reported.
  • Since the IRS requires reporting sales by the transaction date and the monthly statements do so by settlement date, the mismatch may occur on the 1099-K.

What is the MCC?

The Merchant Category Code (MCC) is a 4-digit number used by the card organizations and associations, such as MasterCard and Visa, to categorize businesses based on the types of goods and services they provide.

How is an MCC selected for the 1099-K?

The MCC that best represented the business based on the delegated card association guidelines was assigned to the merchant account that was set up. However, if the business happened to have two or more merchant accounts, then the 1099-K form chooses the MCC of the account that has the highest sales volume.

Receiving the 1099-K even after the account has been closed

Since the IRS requires the activity in that year to be reported, the 1099-K will apply on the account from the beginning of the year till the time the account has been closed.

Form 1099-K and the 1099-MISC

The 1099-MISC forms remain for reporting as they are. The 1099-K is just an additional supporting form.

Penalties for not reporting the 1099-K

The penalties could be anything from the mismatch of gross receipts to the intentional non-filing of Form 1099-K. These consequences could be anything from fines to an audit.

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

If you have any questions or comments about our software, feel free to contact us at any time.

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