1099-K: Online payments and the IRS

Feb. 17, 2012

By Katei Cranford

In the United States, IRS tax form 1099-K, Merchant Card and Third Party Network Payments, has just landed on the desks of merchants who accept and make transactions online.

Aimed at increasing compliance amongst third-party network payment providers and online retailers, the new form is being met with a fair amount of criticism from professionals and legislators in the U.S. Online payments are growing in popularity, particularly as mobile technology and payment systems become more widely available. As this MobilePaymentsToday.com post notes, "over the last year, the global presence and acceptance of mobile payments has truly spread like wildfire," and the IRS wants to cash in on the trend which it deems responsible for the existing tax gap (the difference between what an entity earns versus that which they report.)

Online transactions are a salient scapegoat for the tax gap; Etsy, eBay, and the vast amounts of other small online businesses can often neglect to report income from the multiple sources from which it is derived. Tax form 1099-K works to umbrella the various outlets of income into a single report. The form was created under the Housing and Economic Recovery Act of 2008, which added the 1099-K as a means of tracking electronic transactions.

According to the IRS, "the gross receipts or sales from all business operations (including gross receipts or sales included in any amounts)" should be reported on the 1099-K forms. The aesthetics of 1099-K are similar to tax forms 1099-INT and 1099-DIV on which financial institutions report interest and dividends. Any reportable (taxable) payment transactions must be reported on form 1099-K.

These transactions include those made with a credit card or gift card, or funds accepted as payment via a third-party network like PayPal. Account holders will receive their 1099-K from the individual services providers (Visa, MasterCard, Paypal, etc... .) ATM withdrawals and other examples of cash advances are not included.

Merchant Acquiring Entities

Banks and credit card companies each issue a 1099-K for their account holders. The interesting aspect of the 1099-K involves its inclusion of third-party merchant acquiring entities; PayPal and eBay services are two common examples. According to the IRS, "often called an 'acquiring' or 'merchant' bank, a merchant acquiring entity is the bank or other organization that has the contractual obligation to pay the participating merchant/payee in settlement of payment card transactions."

These entities are the ones responsible for reporting the gross amount. The merchant banks instruct funds transfers to payees and are therefore the ones who report and send 1099-K forms to their merchant payees. According to the IRS, "when both a merchant acquiring entity and a processor have contractual obligations with the merchant to pay, the entity that submits the instructions to transfer funds to the account of the participating merchant is responsible for preparing and submitting Forms 1099-K to the payee and the IRS."


There are few exemptions for those who must file a 1099-K. However, small merchants may not be required to file a 1099-K at all. Only those who have over 200 transactions which total over $20,000 in annual revenue are required to report a 1099-K.


Experts have noticed several problems with the form 1099-K. The major issue involves the reporting of gross payments and income. Gross reporting does not factor charge backs from returns, exchanges, or erroneous transactions; this makes reconciliation between actual income and gross sales difficult.

Additionally, fears over unnecessarily over-burdening small business owners have created a stir amongst legislatures. Congressman Aaron Shock has introduced the 1099-K Overreach Prevention Act, H.R. 3877, which would prevent the implementation of the 1099-K form.

Schock issued a statement outlining the, "unnecessary IRS requirement that will only lead to more accounting headaches for businesses. [His] concern is that the IRS is asking for flawed information from small businesses by requiring them to reconcile their internal numbers with that of third party entities."

Schock's legislation aims to simplify the 1099-K form and prevent forcing merchants to reconcile their gross revenue based on information obtained from third-parties. Such practices can lead to several costly discrepancies because the third-party information doesn't factor issues of fraud, breakages, customer returns, or any other issues which arise in the retail/restaurant world.

Katei Cranford is a freelance financial writer who enjoys life in the digital age.

Topics: Online / Mobile / Social , Online Services , Operations Management , Policy / Legislation

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