Form 1099-K: Merchant Card and Third Party Network Payments (2011)

What Form 1099-K Is For

Form 1099-K is an information return introduced for the 2011 tax year that reports payments you received through credit cards, debit cards, or third-party payment networks like PayPal or other online payment processors. Think of it as a receipt from payment processors showing how much money flowed through their systems to your business during the year.

The form was created under Internal Revenue Code section 6050W to help the IRS track business income that might otherwise go unreported. If you run a business—whether it's a brick-and-mortar store accepting credit cards, an online seller using payment platforms, or a freelancer receiving payments through digital networks—you'll likely receive this form from payment settlement entities (PSEs) that process your transactions.

The key thing to understand: Form 1099-K is not a tax bill. It's simply a record of gross payment amounts that passed through payment processors. The amount shown includes all transactions before any deductions for fees, refunds, chargebacks, or business expenses. You'll use this information to help prepare your tax return, but you won't necessarily owe taxes on the full amount shown.

When You’d Use Form 1099-K (Late or Amended)

Late Forms

If you don't receive your Form 1099-K by mid-February, contact the payment processor listed on the form (or the one you know processed your payments). Their contact information should be in the upper left corner of the form. Don't wait too long—you still need to report your income accurately on your tax return even if the form arrives late or not at all.

Incorrect Information

If the amounts reported on your Form 1099-K are wrong, contact the filer immediately. They can issue a corrected form (marked “CORRECTED” at the top). Common errors include duplicate reporting, transactions from the wrong year, or technical glitches in the payment processor's system.

Amended Returns

If you've already filed your tax return and later receive a corrected Form 1099-K showing different amounts, you may need to file an amended return (Form 1040-X) if the correction affects your tax liability. However, if the gross amounts on your original return already matched your actual income, you typically won't need to amend.

IRS Notice 2011-89

The IRS issued Notice 2011-89 providing penalty relief for the first year of Form 1099-K reporting, acknowledging that both filers and taxpayers were adjusting to the new requirements. This transitional relief meant reasonable good-faith efforts were acceptable for 2011.

Key Rules for 2011

Reporting Thresholds

The reporting thresholds and rules for Form 1099-K in 2011 differ depending on the type of payment processor:

Merchant Card Transactions (Credit/Debit Cards)

Payment processors must report all merchant card transactions regardless of dollar amount or number of transactions. Even if you only processed $100 through credit cards all year, you should receive a Form 1099-K.

Third Party Network Transactions (PayPal, etc.)

For third-party payment networks, reporting is required only when both of these thresholds are exceeded:

• Gross total payments exceed $20,000, and
• Total number of transactions exceeds 200

If you received $25,000 but only in 150 transactions, you wouldn’t receive a Form 1099-K. If you had 250 transactions totaling $15,000, you also wouldn’t receive one.

What’s Included and Excluded

Included:

• ✓ The full transaction amount (before processor fees)
• ✓ All transactions, including those later refunded

Excluded:

• ✗ ATM withdrawals using a payment card
• ✗ Cash advances against credit cards
• ✗ Checks issued in connection with payment cards
• ✗ Transactions where the merchant and card issuer are related parties

Multiple Processors

If you use multiple payment processors (for example, both a traditional merchant account and PayPal), each processor that meets the reporting thresholds will send you a separate Form 1099-K. The forms won’t be combined.

Step-by-Step (High Level)

Step 1: Verify Receipt and Accuracy

When you receive the form by January 31, carefully review it. Check that the filer information, your business name, taxpayer identification number, and the gross payment amounts match your records. Look at both the annual total in Box 1 and the monthly breakdowns in Boxes 5a–5l.

Step 2: Compare to Your Records

Pull your business records—bank statements, accounting reports, and payment processor statements. The gross amount on Form 1099-K should match the total deposits from that processor before any fees were deducted. Investigate discrepancies due to timing differences or errors.

Step 3: Calculate Your Actual Income

Form 1099-K shows gross payments, but you report net income on your tax return. From the 1099-K amount, subtract:

• Payment processing fees
• Refunds and chargebacks
• Business expenses
• Non-income amounts (like transfers between your own accounts)

Step 4: Report on Your Tax Return

Include the income from Form 1099-K on the appropriate schedule of your tax return:

• Schedule C (Form 1040) for sole proprietors
• Form 1065 for partnerships
• Form 1120 or 1120-S for corporations

Step 5: Address Any Discrepancies

If your reported income doesn't match the 1099-K amount exactly, be prepared to explain why. Attach a statement to your return if necessary to explain significant differences.

Common Mistakes and How to Avoid Them

Mistake #1: Double-Counting Income

Fix: Form 1099-K is informational. Don’t add it as separate income; use it to verify completeness.

Mistake #2: Reporting the Gross Amount Without Adjustments

Fix: Subtract fees, refunds, and chargebacks to calculate actual net income.

Mistake #3: Ignoring the Form Entirely

Fix: You must report all income, even if no 1099-K was issued.

Mistake #4: Panicking About High Amounts

Fix: Remember Box 1 shows gross receipts before deductions.

Mistake #5: Not Keeping Adequate Records

Fix: Maintain detailed transaction and expense documentation.

Mistake #6: Misunderstanding the $20,000/200 Threshold

Fix: The threshold only determines when you receive a form—not whether income must be reported.

Mistake #7: Not Reconciling Multiple Forms

Fix: Reconcile all forms from multiple processors to prevent duplication or omissions.

What Happens After You File

IRS Matching Process

The IRS receives Copy A of all Forms 1099-K and matches them to your reported income. Discrepancies may trigger review.

Normal Processing

If your return aligns with reported income, it processes normally.

CP2000 Notices

If mismatches occur, you may receive a CP2000 notice 12–18 months later requesting clarification.

Documentation Matters

Maintain strong records to justify reported amounts and resolve inquiries quickly.

Future Years and Audit Possibility

Consistent, accurate reporting reduces audit risk. For 2011, penalty relief applied due to transition year leniency.

FAQs

Q1: Do I need to attach Form 1099-K to my tax return?

No. Form 1099-K is for your records only. Keep Copy B and use it to verify your reported income.

Q2: What if my Form 1099-K includes personal transactions?

Contact the processor to issue a corrected form. If not corrected, report only your business income and retain documentation for personal transactions.

Q3: I received a Form 1099-K and Form 1099-MISC for the same income. What should I do?

Report the income once and contact the filers for corrections to avoid duplicate reporting.

Q4: What’s the merchant category code (MCC) in Box 2?

The MCC identifies your business type (e.g., restaurant, retail). It’s informational and not required for tax filing.

Q5: Can I deduct payment processing fees?

Yes. Fees are deductible as business expenses. They’re not shown on Form 1099-K but should appear in processor statements.

Q6: I run a hobby, not a business. Why did I receive Form 1099-K?

Processors report based on thresholds, not tax classification. Hobby income must still be reported, but losses aren’t deductible.

Q7: What if I disagree with the Form 1099-K amount?

Report your accurate income and attach an explanatory statement. Keep detailed records to substantiate your figures.

Additional Resources

• 2011 Form 1099-K (PDF)
• 2011 Form 1099-K Instructions (PDF)
• IRS Information Reporting Customer Service: 1-866-455-7438

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