Regulations effective for calendar years after Dec. 31, 2010, require payment settlement entities to report the gross amount of merchant card payments and third party network payments to recipients on IRS Form 1099-K. This update explains which entities are subject to this filing requirement, what information is required to be reported, which transactions are excluded from the filing requirements and some other miscellaneous details related to these regulations.
Which entities are subject to the filing requirements?
The Internal Revenue Code requires Payment Settlement Entities (PSEs) to file Form 1099-K. PSEs are defined as:
A participating payee is any domestic person/organization who accepts payments via payment cards (including account information associated with the cards in absence of the physical cards) or payments from third party settlement organizations.
Payment card transactions can include the use of gift cards, prepaid telephone cards and various other cards, based on the facts and circumstances of the specific transactions. These transactions should be reviewed on a case-by-case basis to determine if they are subject to the Form 1099-K reporting requirements.
For example, a payment card transaction includes the use of a credit card by a customer to purchase goods at a merchant unrelated to the issuer of the credit card. The merchant contracts with a PSE to accept the payment cards. The PSE then routes the transaction through a payment system network (ex, Visa, Mastercard, etc.) ultimately resulting in the posting of the transaction to the cardholder's account. This posting could be managed by the issuing institution or by another entity. The PSE, after transaction approval from the payment network, then routes funds back to the merchant to settle the transaction. In this scenario, the entity having the contractual obligation to make payment to the merchant for the transaction (regardless of whether or not they were the issuer of the card) is the PSE and must file Form 1099-K with respect to all such payments to the merchant.
Third party network transactions can include, but are not limited to, a customer's purchase of goods from a merchant over the Internet using an Internet payment service provider (ex: PayPal). Customers purchase products from the merchant and make payment to the Internet payment service provider who makes payment to the merchant. As long as the Internet payment service provider is unrelated to the parties of the transaction, the Internet payment service provider will be considered to be a PSE/third party settlement organization for the Form 1099-K reporting requirements. Organizations that do not have contractual agreements with merchants to use the payment network, and who operate a network which only processes electronic payments, such as direct deposit payments and wire transfers, between buyers and sellers, are not subject to the Form 1099-K reporting requirements.
Every entity considered a PSE that makes one or more payments in settlement of reportable transactions must file Form 1099-K with respect to each participating payee for that calendar year. However, third party settlement organizations are only required to file Form 1099-K with respect to each participating payee if both the gross amount of total reportable payment transactions to that payee exceeds $20,000 and the total number of reportable payment transactions exceeds 200 (this exclusion does not apply to the settlement of payment card transactions).
What information is required to be reported on Form 1099-K?
The gross amount of reportable payment transactions (payment card and third party network payments) made to each participating payee must be reported on Form 1099-K along with the payee's name, address and tax ID number. Any adjustments to the amount for credits, cash equivalents, discount amounts, fees, refunded amounts or any other items should not be included in the gross amount reported. The dollar amount of each transaction is determined on the date of the transaction.
Which transactions are excluded from the filing requirements?
The regulations explicitly state the following transactions are not required to be reported on Form 1099-K:
What are some of the other various details to be aware of?
If an entity receives payments from a PSE on behalf of one or more participating payees and subsequently distributes these payments to one or more participating payees, then the entity is a participating payee with respect to the original PSE and a PSE with respect to the payees to whom the payments were subsequently distributed.
For example, a corporation collects funds from a bank for credit card sales at the corporation's independently owned franchise stores. In this situation, the bank is a payment settlement entity with respect to the corporation and must file Form 1099-K for the gross amount of payments made to the corporation. In addition, the corporation is also required to report on Form 1099-K the gross amount of payments attributable to each franchise store. Therefore the corporation is a PSE with respect to the franchise stores and a participating payee with respect to the bank.
If an electronic payment facilitator or other third party makes payments in settlement of reportable payment transactions on behalf of a PSE, then the filing requirement for Form 1099-K will be imposed on the electronic payment facilitator or other third party and not the original PSE.
An example includes a bank that retains the contractual obligation to make payments to merchants in settlement of payment card transactions, but enters into a contract with a payment processor for the settlement of funds. Typically the bank retaining the obligation to make payments to merchants files Form 1099-K. However, since the bank entered into a contract with a payment processor whose job includes the preparation and submission of instructions to move the funds from the bank to the merchants, the Form 1099-K filing requirements are imposed on the payment processor. If the processor is only required to prepare the instructions and the bank actually submits the instructions, the bank would continue to retain the Form 1099-K reporting obligation.
If two or more entities qualify as PSEs for the same transaction, the entity who actually makes the payment to settle the transaction will be the entity that is required to file Form 1099-K in relation to the transaction.
Lastly, if any payee fails to provide the payment settlement entity with their correct taxpayer identification number, then reportable payment transactions after Dec.r 31, 2011, to such payee will be subject to withholding of 28 percent.
If you have any questions, please contact your Eide Bailly tax professional.