Form 1099-K: Merchant Card and Third Party Network Payments (2014)

If you accept credit cards, debit cards, or payments through online payment networks, you may receive Form 1099-K. This guide breaks down everything you need to know about this tax form for the 2014 tax year using official information from the Internal Revenue Service.

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 your payment processor showing how much money flowed through your merchant account or payment network.

The form serves two main purposes. First, it helps the IRS track business income to ensure taxpayers report all their earnings. Second, it provides you with a record of your gross receipts for tax preparation. The form reports the gross amount of transactions—meaning the total dollar volume before you subtract refunds, chargebacks, fees, or business expenses.

Two types of entities issue Form 1099-K: payment settlement entities (PSEs), which include merchant acquiring banks and credit card processors, and third-party settlement organizations (TPSOs), which are central organizations that facilitate payments between buyers and sellers through online networks. If a PSE uses an electronic payment facilitator or other contractor to handle payments on their behalf, that facilitator files the form instead.

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

When Recipients Receive the Form

Payment processors must furnish Copy B of Form 1099-K to you by January 31, 2015 for the 2014 tax year. If you don't receive it by mid-February, contact the filer shown on previous forms or your payment processor directly.

When You Need a Corrected Form

If your Form 1099-K contains errors—wrong amounts, incorrect taxpayer identification number (TIN), or other mistakes—contact the issuer immediately and request a corrected form. The corrected form will have an "X" in the "CORRECTED" box at the top.

If you cannot obtain a corrected form before filing your tax return, you should still file on time. Report the incorrect amount on your return, then make an offsetting adjustment showing the error. Document the issue carefully and keep records of your attempts to get the correction.

When Issuers File Late or Amended Forms

Payment processors must file Form 1099-K with the IRS by February 28, 2015 for paper submissions or March 31, 2015 for electronic submissions. If they discover errors after filing, they must correct them as soon as possible by filing a corrected return with the IRS and providing corrected statements to recipients.

Key Rules or Details for 2014

Reporting Thresholds

Payment card transactions (credit cards, debit cards, stored-value cards including gift cards) have no minimum threshold—all amounts must be reported on Form 1099-K, regardless of how small.

Third-party network transactions are only reportable if both conditions are met:

• Gross payments exceed $20,000 during the calendar year, AND
• The total number of transactions exceeds 200

If either threshold isn't met for third-party networks, no Form 1099-K is required.

What Gets Reported

The form shows your gross receipts—the total amount of transactions processed without any deductions. This means:

• Refunds are not subtracted
• Processing fees are not subtracted
• Chargebacks are not subtracted
• Business expenses are not subtracted

You'll subtract these costs later when calculating your net business income on your tax return.

What's Not Reportable

Certain transactions don't require Form 1099-K reporting:

• ATM withdrawals or cash advances using a payment card
• Checks issued in connection with payment cards accepted by merchants
• Transactions where the merchant accepting the card is related to the card issuer (like a business accepting its own gift cards)

International Payments

Complex rules govern payments to foreign accounts or foreign payees. Generally, U.S. payment processors don't need to file Form 1099-K for payments to foreign addresses if they have proper documentation (Form W-8 series) showing the payee is not a U.S. person. However, if there's a U.S. address associated with the account, standing instructions to pay a U.S. bank account, payments requested in U.S. dollars, or knowledge the payee is actually a U.S. person, reporting is required.

Step-by-Step (High Level)

Step 1: Payment Processing Throughout the Year

Each time a customer pays you with a credit card, debit card, or through a third-party network, that transaction gets recorded by your payment processor. The processor tracks the gross amount of each transaction and the number of transactions throughout the calendar year.

Step 2: Year-End Threshold Check

After December 31, your payment processor determines whether you met the reporting thresholds. For payment cards, any amount triggers reporting. For third-party networks, both the $20,000 and 200-transaction thresholds must be exceeded.

Step 3: Form Preparation

If reporting is required, the processor completes Form 1099-K showing:

• Box 1a: Gross amount of all payment card or third-party network transactions
• Box 1b: Amount of "card not present" transactions (online, phone, or mail order sales)—optional for 2014
• Box 2: Merchant category code classifying your business type
• Box 3: Total number of payment transactions (excluding refunds)
• Box 4: Any federal income tax withheld due to backup withholding
• Boxes 5a-5l: Monthly breakdown of gross payments
• Boxes 6-8: State tax information (if applicable)

Step 4: Form Distribution

The processor sends you Copy B by January 31 and files Copy A with the IRS by the February 28 (paper) or March 31 (electronic) deadline.

Step 5: Your Tax Reporting

When preparing your tax return, use Form 1099-K as a reference for your business income. Report your gross receipts on Schedule C (sole proprietors), Schedule F (farmers), or the appropriate business tax return. Then subtract allowable business expenses, including processing fees, to arrive at your net profit. The IRS receives a copy of your Form 1099-K and matches it against your return.

Common Mistakes and How to Avoid Them

Mistake #1: Thinking Form 1099-K Shows Your Taxable Income

The Problem: Many taxpayers mistakenly believe the amount in Box 1a is their taxable income. It's not—it's gross receipts.

How to Avoid: Remember that Form 1099-K shows your total transaction volume before expenses. You'll report this amount on your tax return but then deduct legitimate business expenses like supplies, processing fees, refunds, and operating costs. Only your net profit is taxable.

Mistake #2: Double-Reporting Income

The Problem: If you received both Form 1099-MISC (for services) and Form 1099-K for the same income, you might accidentally report it twice.

How to Avoid: Payments made by credit card or third-party network should only be reported on Form 1099-K, not Form 1099-MISC. Carefully reconcile all your 1099 forms against your own records. If you notice overlap, keep documentation showing the duplication and report the income only once.

Mistake #3: Incorrect Taxpayer Identification Number

The Problem: If your TIN (Social Security Number for individuals, Employer Identification Number for businesses) is wrong or missing, you'll face backup withholding at 28% and receive notices from the IRS.

How to Avoid: Verify your payment processor has your correct TIN on file. Provide Form W-9 when opening merchant accounts. If you receive an IRS notice about TIN mismatches, correct it immediately with both the IRS and your payment processor.

Mistake #4: Filing Duplicate Returns

The Problem: Payment processors sometimes send the same information to the IRS multiple times, or recipients file with multiple schedules showing the same income.

How to Avoid: Check your records carefully. If you have multiple merchant accounts or payment processors, ensure you're not counting the same transactions twice when preparing your return. Maintain detailed records reconciling each Form 1099-K to your own bookkeeping.

Mistake #5: Ignoring Form 1099-K Received in Error

The Problem: You receive a Form 1099-K but the income was personal (like reimbursements from friends, not business), or the amounts are completely wrong.

How to Avoid: Contact the issuer immediately to request correction. If unsuccessful and you must file without a corrected form, report the Form 1099-K amount on your tax return, then show an offsetting entry explaining it was reported in error. Attach documentation supporting your position.

Mistake #6: Missing Decimal Points on Amounts

The Problem: When manually entering amounts from Form 1099-K, omitting decimal points can inflate figures from $1,230.00 to $123,000.

How to Avoid: Always include decimal points and cents when transcribing amounts. Double-check your entries against the original form.

Mistake #7: Not Keeping Adequate Records

The Problem: When Form 1099-K doesn't match your records, but you can't prove what actually happened because your bookkeeping is incomplete.

How to Avoid: Maintain detailed records throughout the year. Track all transactions, refunds, chargebacks, and fees separately. Reconcile your merchant statements monthly. Good records are your best defense if questions arise.

What Happens After You File

Immediate Processing

Once the payment processor files Form 1099-K with the IRS, the information enters the IRS computer systems. The IRS matches this data against the income you report on your tax return.

IRS Matching Program

The IRS runs automated matching programs comparing Forms 1099-K received from payment processors against Schedule C, Schedule F, or other business income reported on your tax return. If amounts don't match, you may receive a notice months or even years after filing.

Common IRS Notices Related to Form 1099-K

If discrepancies exist, you might receive:

• CP2000 Notice: Proposes changes to your return based on mismatched income
• Letter 525: Requests additional information about income reporting
• CP2100/CP2100A Notice: Sent to payment processors (not you) regarding TIN mismatches

Resolving Discrepancies

If you receive a notice:

• Don't panic—it's not an audit, just an inquiry
• Review the notice carefully to understand what the IRS is questioning
• Gather your records: Form 1099-K, business expense receipts, bank statements
• Respond by the deadline stated in the notice
• If the IRS is correct, pay any additional tax due
• If you're correct, provide documentation explaining the discrepancy

Backup Withholding Consequences

If your TIN was missing or incorrect on your merchant account during 2014, your payment processor should have withheld 28% of your payments for backup withholding. This amount appears in Box 4 of Form 1099-K. You can claim this withholding as a credit against your tax liability when you file your return, just like wage withholding from a W-2.

Statute of Limitations

Generally, the IRS has three years from when you filed your return (or the return's due date, whichever is later) to assess additional taxes. If you substantially underreport income (by 25% or more), the IRS has six years. If you don't file a return, there's no statute of limitations.

FAQs

Q1: I only occasionally sell items online as a hobby. Do I need to report Form 1099-K income?

Yes, you must report all income received, even from hobbies. However, if your activity is truly a hobby (not a business), report the income differently. For 2014, hobby income goes on Form 1040, Line 21 as "Other Income." Unlike business income on Schedule C, hobby expenses can only be deducted as miscellaneous itemized deductions on Schedule A (subject to the 2% adjusted gross income threshold), and you cannot deduct losses. If your selling activity shows profit motive and business-like characteristics, report it on Schedule C instead.

Q2: The amount on my Form 1099-K is much higher than my actual income because of refunds and fees. What do I do?

This is normal. Form 1099-K reports gross receipts, not net income. On Schedule C, report your gross receipts (which should match or reconcile to Form 1099-K), then deduct business expenses including refunds issued, processing fees, cost of goods sold, and other legitimate expenses. Your taxable income is the net profit after expenses, not the Form 1099-K amount.

Q3: I received Form 1099-K for personal payments friends sent me to split dinner bills and rent. Is this taxable?

Personal reimbursements from friends and family are not taxable income. Contact the payment processor immediately to have them issue a corrected Form 1099-K removing these amounts. If you cannot get a correction before your filing deadline, report the Form 1099-K amount on your tax return, then create an offsetting entry showing "Form 1099-K Personal Reimbursements Received in Error" as a negative amount. Document everything thoroughly in case of IRS questions.

Q4: I have multiple merchant accounts and received several Forms 1099-K. How do I report these?

Combine the gross receipts from all Forms 1099-K when calculating your total business income on Schedule C or your business return. Make sure you're not double-counting any transactions that might appear on multiple forms. Keep all Forms 1099-K with your tax records in case you need to explain the reconciliation to the IRS.

Q5: What's the difference between Form 1099-K and Form 1099-MISC?

Form 1099-MISC reports various types of payments including services, rent, and prizes—typically when paid by check, cash, or direct bank transfer. Form 1099-K specifically reports payment card transactions and third-party network payments. For transactions after December 31, 2010, if a payment is made by credit card or through a third-party payment network, it should only appear on Form 1099-K, not Form 1099-MISC, regardless of whether it would have qualified for Form 1099-MISC reporting under the old rules.

Q6: My Form 1099-K shows $25,000 but my bank deposits were only $23,000. Why the difference?

Several legitimate reasons explain this discrepancy:

• Processing fees deducted before deposit (you received net, form shows gross)
• Refunds or chargebacks issued that reduced your deposits
• Transactions processed in late December but deposited in January
• Rolling reserves held by the payment processor
• Timing differences between transaction dates and settlement dates

Keep detailed merchant statements reconciling Form 1099-K to your actual deposits. You'll report the gross amount from the form, then deduct fees and adjustments as business expenses.

Q7: I didn't receive a Form 1099-K but I know I accepted credit cards. Do I still report the income?

Absolutely. Whether or not you receive Form 1099-K, you must report all income received. You're legally required to report all business income regardless of whether an information return was filed. Check if you fell below the reporting thresholds ($20,000 and 200 transactions for third-party networks), which would explain why no form was issued. Use your own records—merchant statements, bank deposits, bookkeeping records—to accurately report your gross receipts on your tax return.

Sources

All information in this guide comes from official IRS publications for the 2014 tax year:

• 2014 Instructions for Form 1099-K
• 2014 Form 1099-K
• 2014 General Instructions for Certain Information Returns

For the most current information and updates, visit www.irs.gov/form1099k or call the IRS Information Reporting Customer Service line at 1-866-455-7438 (toll-free) or 304-263-8700.

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