By now, you probably have a stack of tax forms from employers, banks, stockbrokers, lenders, and more on your desk – or more likely, the kitchen counter. For some of you, those tax forms will end up in the hands of your tax professional (for more on hiring a tax professional, click here); the rest of you will input the information on those forms, box for box, into tax preparation software – maybe with a little swearing along the way. No matter how you plan to do your taxes this year, you likely don’t know what all of the numbers, letters, and other information on those forms mean. That’s about to change. This is the next in a series of posts meant to help you make sense of all of those forms.
Here’s what you should know about the form 1099-K, Payment Card and Third Party Network Transactions.
Form 1099-K, Payment Card and Third Party Network Transactions, is used to report certain payments for goods and services paid by credit card or third-party merchants. For purposes of the form, a reportable payment transaction is 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. It does not include ATM withdrawals, cash advances against a credit card, a check issued in connection with a payment card, or any transaction in which a payment card is accepted as payment by a merchant or other payee who is related to the issuer of the card.
The form is generally provided if you have accepted payment cards for payments or if you have received payments through a third-party network that exceeded $20,000 in gross total reportable transactions and the aggregate number of those transactions exceeded 200 for the calendar year.
In simple terms, this means that taxpayers who have a credit card merchant account, Paypal account, or similar account and otherwise meet the criteria will receive form 1099-K from their service provider. That would include professionals like lawyers and architects who accept online or credit card payments for services, freelancers compensated via PayPal and Etsy sellers, affiliates, eBay merchants, and other small businesses who accept credit cards, debit cards, or PayPal as payment. Some companies, like Uber, also issue Form 1099-K to those non-employees who accept credit cards as payment.
The payer’s identifying information is reported on the top left side of Form 1099-K while your identifying information is reported on the lower left side of the form. This includes your name and your address. Your account number may also be on the form: the number is optional and doesn’t affect your return.
Between the identifying information for the payer and the payee, you’ll see two boxes. For the box on the left, the payer will check to note whether it qualifies as a payment settlement entity (PSE), an electronic payment facilitator (EPF), or another third party. For the box on right, the payer will check to indicate whether it’s reporting payment card transactions or third party network transactions on the form. If the payer needed to report both card and third party network transactions, those would be reported on separate forms 1099-K.
Your Social Security Number – or just the last few digits – will also be on the form just to the right of the identifying information. The first digits of the number may be redacted for your privacy (this is a relatively new development for certain forms); no matter what your copy indicates, the issuer will report your entire Social Security Number on the Copy A provided to IRS.
In box 1a, you’ll find the gross amount of the total reportable payment card/third party network transactions for the calendar year. It’s important to understand that this number is the gross amount which is the amount of total reportable payment transactions without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts. This may not represent the actual amount which is taxable to you. It’s important that you keep good records so that you can properly report amounts paid to you. In most situations, you’ll report Schedule 1099-K income on your Schedule C on your 1040: you’ll also deduct your expenses and account for adjustments on that schedule.
In box 1b, you’ll find the total reportable payment card/third party network transactions for the calendar year where the card was not present at the time of the transaction or the card number was keyed into the terminal. The amount in this box is typically high if you manage an online store or if you do sales by phone or mail – any arrangement where you don’t have the actual card in your physical possession.
At box 2a, you’ll see a 4-digit merchant category code (MCC) used by the payment card industry to classify your business. There are a lot of codes on the list. You can see the entire list (if you’re curious) here.
Box 3 reports the number of payment transactions (not including refund transactions) processed through the payment card/third party payer network during the calendar year.
Box 4 shows the amount of backup withholding. Generally, you’ll see an amount in this box if you did not furnish your taxpayer identification number (TIN) or you did not furnish the correct TIN to the payer. You’ll report this amount on your income tax return as tax withheld/paid.
Boxes 5a through 5l show the gross amount of the total reportable payment transactions for each month of the calendar year. Remember, these numbers may not match the numbers on your own books.
If state tax was withheld, you’ll see that information included at boxes 6-8.
Finally, remember that Form 1099-K is used to report gross receipts charged on the credit card or via a third-party processor. You must still report income received from other sources, such as cash payments or those paid by check or wire transfer.
(For more information on the history and applicability of Form 1099-K, click here.)
