Form 1099-K, Payment Card and Third Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance. You should receive Form 1099-K by January 31st if, in the prior calendar year, you received payments from payment card transactions (e.g., debit, credit or stored-value cards), and/or in settlement of third-party payment network transactions above the minimum reporting thresholds of:
- gross payments that exceed $20,000, AND
- more than 200 such transactions
Who files a 1099-K form?
Let’s go into more detail about who files a 1099-K. These types of organizations issue a 1099-K to any providers of goods and services:
Payment Settlement Entity (PSE): an organization that facilitates payments between parties for payment cards or third party payment networks. There are two types of PSEs:
Merchant Acquiring Entity (MAE): a merchant acquiring entity is a type of PSE that has the contractual obligation to make a payment to a merchant (e.g., Target) in settlement of a payment card transaction.
Third-Party Settlement Organization (TPSO): an agreement where a third party handles payments between someone providing goods/service and the purchaser.
What companies and organizations qualify as a TPSO?
In general, a company must meet certain requirements to be considered a TPSO. Those requirements include:
Third-party settlement organizations (TPSOs) and third-party payment networks are only required to issue a 1099-K after processing over 200 transactions and paid out over $20,000 to the payee over the course of a year.
There’s still a lot of gray area surrounding the obligation to file and issue 1099-Ks. The form is relatively new and as the worlds of money transferring and business payments are changing, so too are the ways of reporting. When in doubt about your particular situation, it’s best to get advice from a tax advisor.
Who receives a 1099-K?
Recipients of a 1099-K are mostly vendors who have received payment using a TPSO or third-party payment network. An Etsy seller, for example, would receive a 1099-K from Etsy as Etsy has concluded it satisfies the criteria for a TPSO. Examples of individuals who would receive Form 1099-K include freelancers compensated via PayPal, Etsy sellers, Uber drivers who accept credit cards as payment, small businesses who accept card transactions as payment, and in general professionals who accept online or credit card payments for services. The seller would also need to meet the minimum 1099-K thresholds of processing 200 transactions and $20,000 in gross volume. Whether the payee (vendor or contractor) receives a 1099-K or not, they are still required to report that income to the IRS and pay taxes accordingly. A third-party settlement organization is required by the IRS to issue a 1099-K to customers who have met certain processing thresholds, regardless of their tax classification. So even tax-exempt organizations or corporations would receive the Form 1099-K if they meet the processing threshold.
For 2017 payments, 1099-Ks must be sent to recipients by January 31, 2018. Copies of each 1099 issued must be sent to the IRS. If filed by mail, the deadline is February 28, 2018. But, if filing electronically, the deadline is March 31, 2018. Just to put that in another handy format:
January 31, 2018 — Send 1099 form to recipients
February 28, 2018 — Mail 1099-K forms to the IRS
March 31, 2018 — E-file 1099-K forms with the IRS via FIRE
Penalties for not filing
If you neglect to file 1099s when you should or file too late, then you could face some hefty fines. Depending on how late 1099s are filed, penalties range anywhere from $50-$260 per failure, per form, with a maximum of $3,193,000 per failure. In other words, a payor can be assessed $260 per form for failure to file with the IRS and $260 for failure to furnish the same form to the payee (for a maximum of $6.3 million).
What does the Form 1099-K report to me?
A Form 1099-K includes the gross amount of all reportable payment transactions. You will receive a Form 1099-K from each payment settlement entity from which you received payments in settlement of reportable payment transactions. A reportable payment transaction is defined as a payment card transaction or a third party network transaction.
- Payment card transaction means any transaction in which a payment card, or any account number or other identifying data associated with a payment card, is accepted as payment.
- Third party network transaction means any transaction that is settled through a third party payment network, but only after the total amount of such transactions exceeds $20,000 and the aggregate number of such transactions exceeds 200.
The gross amount of a reportable payment does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts. The dollar amount of each transaction is determined on the date of the transaction.
NOTE: The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.
What should I do with this information?
It is important that your business books and records reflect your business income, including any amounts that may be reported on Form 1099-K. You must report on your income tax return all income you receive from your business. In most cases, your business income will be in the form of cash, checks, and debit/credit card payments. Business income is generally referred to as gross receipts on income tax returns. Therefore, you should consider the amounts shown on Form 1099-K, along with all other amounts received, when calculating gross receipts for your income tax return.
In addition —
- Check your payment card receipt records and merchant statements to confirm that the amount on your Form 1099-K is accurate
- Review your records to ensure your gross receipts are accurate and reported correctly on your income tax return
- Determine whether you have reported income from all forms of payment received, including cash, checks, and debit, credit and stored-value card transactions.
- Maintain documentation to support both the income and deductions you report on your income tax return