January 25, 2012

New Form 1099-K Filing Requirement for Merchant Card and Third Party Network Payments

New Form 1099-K Filing Requirement for Merchant Card and Third Party Network Payments Tax & Business

As a result of new compliance reporting, effective for tax years beginning January 1, 2011, banks and other payment settlement entities (PSEs) must file new IRS Form 1099-K, Merchant Card and Third Party Network Payments, to report certain payments during the year. For the 2011 tax year, Form 1099-K must be provided to each payee by January 31, 2012. The IRS must receive these forms by February 28, 2012, if paper filing, or April 2, 2012, if electronically filing.

The reporting requirements were originally included within the Housing and Economic Recovery Act of 2008, or HERA, and did not kick in until 2011. Certain payments for goods and services paid by credit card or third party merchants will now be reported to the IRS via the form 1099-K. The rules were implemented as an attempt to assist the IRS in keeping track of (some of) the underground economy. The form 1099-K is very similar to form 1099-INT and 1099-DIV used by banks to report interest and dividends.

Payment Settlement Entities are entities which have a “contractual obligation to make payment to participating payees in settlement of payment card transactions.” These PSEs can be either domestic or foreign, including private businesses and government entities. Third party settlement organizations (TPSOs), such as online auction-payment facilitators, also qualify as PSEs. Examples of such merchants include: bloggers, etsy sellers, affiliates, PayPal, Amazon, Google, and Ebay merchants. (Healthcare networks, automated clearing houses, and account payable departments do not meet the criteria.) A reportable payment transaction is basically a transaction in which a payment card (such as a credit card or gift card) is accepted as payment or any transaction that is settled through a third party payment network, like PayPal.

Authorizing the transfer of funds to settle payment with a payee indicates that a PSE must file Form 1099-K. When more than one entity meets the definition of a PSE, the entity authorizing the transfer is required to report the gross amount of transactions, as of the transaction date(s), on Form 1099-K. If a bank were to outsource its transaction processing, both the bank and the processing firm would be considered PSEs. Only the bank would have to file Form 1099-K, though, if it authorized payment. The filing obligation can be reassigned to another entity, in writing. However, if the assigned entity does not file in a timely fashion, the PSE with the initial filing requirement would be subject to penalty.

De minimis exceptions apply when the dollar value of annual transactions between a third party PSE and a payee does not exceed $20,000, or the quantity of these transactions do not exceed 200. The following transactions also do not generate the 1099-K filing requirement:

  • Withdrawing funds at an ATM (automated teller machine)
  • Cash advances
  • Loans against cardholder accounts
  • Checks issued in association with a payment card (“convenience checks”)
  • Related party transactions

Participating payees are generally domestic merchants that accept payment cards for goods or services rendered. Payment cards include debit cards, credit cards, gift cards, transit cards, and EBT (electronic benefit transaction) cards issued by the government. Payees can also accept an account number or other payment card equivalent from a PSE.

For 2011 tax year filings, the IRS will abate penalties if it concludes the filer made a good faith effort to correctly report this information.

If you have any questions, please contact your Marcum tax professional.

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