Form 1099-K: Merchant Card and Third Party Network Payments (2012)
What Form 1099-K Is For
Form 1099-K is an information return that reports payment card transactions and third-party network payments you received during the 2012 calendar year. Think of it as the IRS's way of tracking business income processed through credit cards, debit cards, gift cards, and online payment platforms like PayPal or other payment processors.
If you accepted credit or debit cards for your business, or if you sold goods or services through online marketplaces or payment apps, you likely received a Form 1099-K. The form was introduced in 2011 to help the IRS ensure that business income processed through these modern payment methods gets properly reported on tax returns.
The form is issued by Payment Settlement Entities (PSEs)—typically banks that process credit card payments (merchant acquirers) or third-party settlement organizations like payment processors. These organizations are legally required to report your payment transactions to both you and the IRS.
Source: IRS.gov
It's important to understand that Form 1099-K reports gross amounts—meaning the total payments before any deductions for fees, refunds, chargebacks, or other adjustments. You'll need to account for these adjustments when calculating your actual taxable income.
When You’d Use It (Late/Amended Filing)
If You're a Payee (Recipient)
You don't file Form 1099-K yourself—you receive it from payment processors. However, you must report the income shown on Form 1099-K on your tax return (typically Schedule C for sole proprietors or the appropriate business tax form).
If you receive a corrected Form 1099-K showing different amounts, you may need to file an amended tax return (Form 1040-X) if you've already filed your original return.
If You're a Payment Settlement Entity
For the 2012 tax year, you had to furnish Copy B to recipients by January 31, 2013, and file Copy A with the IRS by February 28, 2013 (April 1, 2013 if filing electronically).
Missing these deadlines could lead to penalties under Internal Revenue Code sections 6721 and 6722.
Source: IRS.gov
Corrected Returns
If you need to correct a Form 1099-K after filing, you must file a corrected form marked “CORRECTED” in the appropriate box.
Common reasons include:
- Incorrect payment amounts
- Wrong taxpayer identification numbers
- Reporting transactions for the wrong tax year
The 2012 General Instructions for Certain Information Returns provides detailed procedures for making corrections.
Void Returns
If you need to void a previously filed Form 1099-K entirely (for example, if it was filed in error), you must file a new form marked “VOID” and provide a corrected statement to the recipient if one was already furnished.
Key Rules for 2012
Reporting Thresholds
For third-party network transactions in 2012, Form 1099-K was required only if both of the following conditions were met:
- Gross payments exceeded $20,000, and
- Total number of transactions exceeded 200
However, payment card transactions (credit cards, debit cards) had no minimum threshold—all amounts were reportable regardless of total dollars or transaction count.
Source: IRS.gov
What Gets Reported
The form reports the gross amount of payment transactions—the total before any adjustments for:
- Credit card processing fees
- Refunds or chargebacks
- Discount amounts
- Cash equivalents
- Any other deductions
What Doesn’t Get Reported
Certain transactions were specifically excluded from Form 1099-K reporting:
- ATM withdrawals using a payment card
- Cash advances or loans against the cardholder's account
- Checks issued in connection with a payment card
- Transactions where the merchant and card issuer are related parties
Dual Reporting Eliminated
An important 2012 rule stated that payments made by payment card or through third-party payment networks were reported only on Form 1099-K, not on Form 1099-MISC, even if they otherwise would have met the $600 reporting threshold for Form 1099-MISC.
Source: IRS.gov
Step-by-Step (High Level)
For Recipients (Payees) – What to Do When You Receive Form 1099-K
Step 1: Verify the Information
Review your Form 1099-K carefully when you receive it (typically by January 31, 2013). Check that Box 1 (gross amount) matches your records.
If discrepancies exist, contact the filer or the PSE immediately.
Step 2: Reconcile Your Records
Remember that Box 1 shows gross receipts before deductions. Compare this to your business records and calculate deductible expenses such as:
- Payment processing fees
- Refunds issued to customers
- Chargebacks
- Cost of goods sold
- Other ordinary and necessary business expenses
Step 3: Report on Your Tax Return
Report the income from Form 1099-K on the appropriate tax form for your business structure (typically Schedule C attached to Form 1040). Deduct legitimate business expenses to determine your net profit or loss.
Step 4: Keep Documentation
Maintain copies of Form 1099-K along with supporting documentation (monthly statements, fee schedules, refund records) for at least three years in case of an IRS audit.
Source: IRS.gov
For Payment Settlement Entities – Filing Requirements
Step 1: Determine Filing Obligation
Verify that you meet the definition of a PSE and that you processed reportable payment transactions during 2012.
Step 2: Gather Transaction Data
Collect all payment transaction data for each participating payee, including gross amounts by month, merchant category codes, and transaction counts.
Step 3: Apply De Minimis Rule
For third-party network transactions only, verify that each payee exceeded both thresholds ($20,000 and 200 transactions) before including them.
Step 4: Prepare and File
Complete Form 1099-K for each qualifying payee, furnish Copy B to recipients by January 31, 2013, and file Copy A with the IRS by February 28, 2013 (or April 1, 2013 if filing electronically).
Common Mistakes and How to Avoid Them
Mistake #1: Confusing Gross Receipts with Net Income
Issue: Many first-time recipients mistake the Box 1 amount as taxable income.
Fix: Deduct legitimate expenses such as processing fees and COGS. Keep detailed records for deductions.
Mistake #2: Not Reporting All Payment Types
Issue: Some taxpayers forget to report cash or check income.
Fix: Maintain comprehensive income records from all sources, not just those on Form 1099-K.
Mistake #3: Using the Wrong Merchant Category Code
Issue: Incorrect MCC assignment leads to misclassification.
Fix: Use the correct MCC or the one representing the largest portion of business if multiple categories apply.
Mistake #4: Failing to File Corrected Forms
Issue: Not promptly correcting errors after filing.
Fix: Implement quality checks and file corrected forms marked “CORRECTED”.
Source: IRS.gov
Mistake #5: Missing Foreign Payee Exceptions
Issue: Reporting foreign payees who are exempt.
Fix: Review foreign payee rules and obtain proper documentation (Form W-8BEN).
Mistake #6: Double-Reporting Income
Issue: Reporting income shown on both Form 1099-K and Form 1099-MISC.
Fix: Remember that 2012 rules require reporting only on Form 1099-K for payment card and network transactions.
What Happens After You File
For Payees (Recipients)
After you file your return, the IRS matches reported income against Forms 1099-K.
If mismatches occur, you may receive a CP2000 notice proposing additional tax or penalties.
To avoid this, report all income and keep supporting documentation.
Source: IRS.gov
For Payment Settlement Entities
After you file, IRS systems use your data to verify payee income.
If you filed correctly and on time, no further action is needed.
Late or erroneous filings may trigger penalties, including:
- Up to $100 per form (if filed up to 30 days late)
- Higher penalties for later filings or non-filing
- Intentional disregard penalties for willful noncompliance
You may also receive inquiries from payees if reported data doesn’t match their records.
FAQs
Q1: I received a Form 1099-K, but some payments were refunds. Do I have to report the full amount?
Yes. Form 1099-K reports gross payments. Report gross receipts, then deduct refunds as adjustments or expenses. Keep records of refunds.
Q2: I received a Form 1099-K for more than I actually earned. What should I do?
Check if the amount includes processing fees. If it still seems incorrect, contact the filer or PSE for correction and document your request.
Q3: I sold personal items at a loss and received a Form 1099-K. Do I still have to report it?
Yes. Report it with an explanation that sales were of personal items at a loss. Do not ignore the form.
Source: IRS.gov
Q4: I run a small business and use third-party payment networks. Will I get a Form 1099-K?
Only if you exceeded both $20,000 in gross payments and 200 transactions. Even without a form, you must report all income.
Q5: The MCC on my Form 1099-K is wrong. Does this matter?
Generally no—it’s informational. But if significantly inaccurate, contact the PSE to correct it.
Q6: I’m a PSE. Do I need to report international transactions?
Usually no, if you’ve verified the payee’s foreign status with Form W-8BEN. If indicators of U.S. status exist, you must report.
Source: IRS.gov
Q7: I received both Form 1099-K and Form 1099-MISC for the same income. Which should I use?
For 2012, report using Form 1099-K only. Contact both filers for correction if you received duplicates.
Additional Resources
For the most current information and updates on Form 1099-K, visit IRS.gov/form1099k.
You can also download:
- The 2012 Form 1099-K
- Instructions for Form 1099-K
- General Instructions for Certain Information Returns
For assistance, call the IRS Information Reporting Customer Service at 1-866-455-7438 (Monday–Friday, 8:30 a.m. to 4:30 p.m. ET).
