Form 1099-K: Merchant Card and Third Party Network Payments (2013)
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 calendar year. Think of it as a receipt from payment processors showing how much money flowed through your business or side gig.
This form was introduced to help the IRS track income from credit card sales, debit card transactions, and payments through third-party networks like PayPal or other payment apps. If you accepted credit cards at your small business, sold items online through platforms like eBay, or received payments through apps like PayPal or Venmo for goods and services, you might receive this form.
The form is issued by Payment Settlement Entities (PSEs)—typically your credit card processor, merchant account provider, or third-party payment organization. It reports the gross amount of transactions processed, meaning the total before you deduct expenses, refunds, or fees. The PSE sends Copy B to you, Copy A to the IRS, and keeps Copy C for their records.
When You’d Use Form 1099-K
Most recipients receive Form 1099-K by January 31 following the tax year. If you're a payment processor or settlement entity with filing obligations, you must file Copy A with the IRS by February 28 if filing on paper, or March 31 if filing electronically.
Late Filing
If you're a filer who missed the deadline, you should submit the form as soon as possible to minimize penalties. The IRS imposes penalties under sections 6721 (failure to file correct information returns) and 6722 (failure to furnish correct payee statements). Penalties vary based on how late the filing is, with reduced penalties if you correct the issue within 30 days.
Amended Returns
If you discover errors on a Form 1099-K after filing, you must file a corrected form. Check the "CORRECTED" box at the top of the form and complete all required fields, not just the corrected information. Common reasons for corrections include wrong taxpayer identification numbers, incorrect gross payment amounts, or misclassified transaction types. Keep detailed records of why you filed a correction in case the IRS has questions.
Key Rules or Details for 2013
The 2013 tax year had specific thresholds that determined whether a Form 1099-K was required:
For Third-Party Settlement Organizations (TPSOs)
You only received a Form 1099-K if your transactions exceeded both of these thresholds:
- Gross payments totaling more than $20,000, AND
- More than 200 separate transactions
Both conditions had to be met. If you received $25,000 through only 150 transactions, no form was required. If you had 250 transactions totaling only $15,000, no form was required.
For Payment Card Transactions
If you accepted credit or debit cards through a merchant account, there was no minimum threshold. Any amount of payment card transactions could be reported, regardless of how small.
Important Distinction
Payment card transactions (credit/debit cards) had no threshold, while third-party network transactions (like PayPal for goods and services) required meeting both thresholds. This meant even a small business accepting credit cards might receive a 1099-K, while someone with significant PayPal activity might not if they didn't meet both requirements.
Gross Amounts Reported
The form reported gross amounts—the total before deducting refunds, chargebacks, fees, or business expenses. This is crucial because the number on your 1099-K will likely be higher than your actual taxable income.
Step-by-Step (High Level)
For Recipients (Payees)
Step 1: Receive and Review
You'll receive Form 1099-K by January 31. Verify that the filer information matches your payment processor and that your business name and taxpayer identification number are correct.
Step 2: Understand Box 1
This shows the gross amount of all payment transactions. This is NOT your taxable income—it's the total before expenses, refunds, and fees. Box 2 shows the merchant category code classifying your business type.
Step 3: Review Monthly Breakdown
Boxes 5a through 5l show monthly totals. Compare these against your own records to ensure accuracy. Box 3 shows the number of transactions.
Step 4: Reconcile with Your Records
Match the 1099-K amounts against your business accounting. Account for differences like refunds, processing fees, and transactions that weren't business income (like personal reimbursements).
Step 5: Report on Your Tax Return
Report your actual business income on Schedule C (or appropriate return). The 1099-K amount should match your gross receipts, but you'll deduct legitimate business expenses to arrive at taxable income.
Step 6: Keep Documentation
Retain the form and supporting records for at least three years in case of IRS questions.
For Filers (Payment Processors)
Payment settlement entities must identify which merchants exceeded thresholds, collect accurate taxpayer identification numbers, calculate gross payment amounts for the year, complete Form 1099-K for each qualifying payee, and file electronically if filing 250 or more forms.
Common Mistakes and How to Avoid Them
Mistake 1: Treating the 1099-K Amount as Pure Profit
Many recipients panic when they see a large number in Box 1, thinking they owe taxes on the entire amount. Remember, this is gross receipts before expenses. If you received a 1099-K for $50,000 but had $40,000 in business expenses, your taxable income is only $10,000. Keep meticulous records of all business expenses to offset this gross amount.
Mistake 2: Ignoring Personal or Non-Business Transactions
If your 1099-K includes amounts that weren't business income—like personal reimbursements from roommates or selling personal items at a loss—you're not taxed on these amounts. However, you'll need to document why these transactions weren't taxable business income if the IRS asks.
Mistake 3: Not Reconciling Multiple 1099-Ks
If you use multiple payment processors (PayPal, Stripe, Square), you might receive several Forms 1099-K. You must account for all of them when preparing your tax return. Organize forms by processor and ensure you're not double-reporting any income.
Mistake 4: Incorrect Taxpayer Identification Numbers
Filers sometimes report the wrong Social Security Number or Employer Identification Number. This can trigger backup withholding at 28% of future payments. Always verify your TIN with your payment processor and update it immediately if it changes.
Mistake 5: Forgetting About Backup Withholding
If you didn't provide your TIN to the payment processor, they must withhold 28% for taxes (shown in Box 4). Many recipients forget to claim this withheld amount as a credit on their tax return. This is money you've already paid—don't leave it on the table.
Mistake 6: Misunderstanding Refunds
The gross amount in Box 1 doesn't subtract refunds or chargebacks you issued to customers. You need to track these separately and adjust your reported income accordingly. Keep detailed records of all refunds throughout the year.
What Happens After You File
For Payees
After receiving your Form 1099-K, the IRS has already received a copy. When you file your tax return, the IRS computers will match the 1099-K information against what you reported. If you properly reported your business income on Schedule C or the appropriate form, and the amounts reasonably reconcile with the 1099-K (accounting for expenses and adjustments), you shouldn't hear anything further.
If there's a significant discrepancy, you might receive a CP2000 notice—this isn't an audit, but rather the IRS asking you to explain the difference. Respond promptly with documentation showing how you calculated your taxable income from the gross 1099-K amount.
For Filers
After submitting Forms 1099-K to the IRS and payees, your obligation is complete unless errors are discovered. The IRS may contact you if there are problems with the submissions, such as missing or invalid taxpayer identification numbers. You may face penalties for late filing ($50-$280 per form in 2013, depending on how late) or for incorrect information.
Keep copies of all filed forms for at least three years. If you used an Electronic Payment Facilitator to file on your behalf, remember that you may still be liable for penalties if they fail to file properly, unless you had a written agreement transferring responsibility.
FAQs
Q1: I received a 1099-K but I'm not a business. Do I still need to report this?
Yes, but how you report depends on the nature of the income. If you sold personal items for less than you paid (like used furniture or clothes), these sales generally aren't taxable—but you should keep records proving these were personal items sold at a loss. If you performed services or sold goods for profit, even as a side gig, this is taxable income that must be reported. The IRS received a copy of your 1099-K, so they'll expect to see this income addressed on your return.
Q2: The amount on my 1099-K is much higher than my actual income. What do I do?
This is common and expected. The 1099-K shows gross receipts before you subtract business expenses, refunds, chargebacks, and processing fees. When you file your tax return, you report the gross receipts and then deduct your legitimate business expenses. For example, if your 1099-K shows $30,000 but you spent $8,000 on inventory, $2,000 on shipping, and $1,000 on supplies, your taxable income is only $19,000. Keep detailed records of all expenses.
Q3: I didn't receive a 1099-K but I had credit card sales. Do I still report the income?
Absolutely. You must report all business income regardless of whether you received a 1099-K. The thresholds merely determine when payment processors must file the form—they don't determine whether income is taxable. If you had business income below the $20,000/200-transaction threshold for third-party networks, you still owe taxes on that income. Report it accurately on your tax return based on your own business records.
Q4: Can I be taxed on the same income twice if it appears on both a 1099-K and a 1099-MISC?
For 2013, the IRS clarified that payments made by payment card or through a third-party network that would otherwise require a 1099-MISC should only be reported on Form 1099-K, not both. If you received both forms for the same income, contact the filers to correct the error. When filing your tax return, report the income only once and keep documentation showing the duplication in case the IRS questions it.
Q5: What if my 1099-K has incorrect information?
Contact the filer (the payment processor shown in the upper left corner) immediately to request a corrected form. They should issue a corrected 1099-K with the accurate information. Don't file your tax return based on incorrect information—wait for the correction if possible, or file based on your accurate records and attach an explanation if you can't wait for the corrected form.
Q6: Do I need to attach Form 1099-K to my tax return?
No, you don't attach 1099-K forms to your tax return. Keep them with your tax records for your own reference and in case of an IRS inquiry. The IRS already has copies of all 1099-K forms filed, so they'll use their copy to verify your reported income. Simply report your business income accurately on the appropriate schedules.
Q7: I received a 1099-K for payments that included sales tax I collected. Do I owe tax on the sales tax amount?
Sales tax you collected and remitted to state authorities is not your income and is not taxable. However, many 1099-K forms include sales tax in the gross amount because payment processors can't always distinguish between sales tax and business revenue. You should track sales tax separately and exclude it from your taxable income when filing your return. Keep documentation showing sales tax collected and remitted to substantiate this adjustment.
Sources & Official Guidance
For more information and the most current guidance, visit the official IRS resources:
- About Form 1099-K
- 2013 Form 1099-K Instructions
- Understanding Your Form 1099-K
