Form 1099-K: Merchant Card and Third Party Network Payments (2017 Tax Year)

What Form 1099-K Is For

Form 1099-K is an information return used to report payments received through payment cards (credit cards, debit cards, gift cards) and third-party payment networks (such as PayPal or other payment settlement organizations). Think of it as a receipt that payment processors send to both you and the IRS showing how much money flowed through their systems to your account during the calendar year.

The form exists because Congress wanted to ensure that income from electronic payment transactions gets properly reported on tax returns. If you're a merchant who accepts credit cards, or if you sell goods or services through online platforms that handle payments for you, you'll likely receive this form. It's important to understand that receiving a 1099-K doesn't automatically mean you owe taxes on the full amount shown—it simply reports the gross payment volume, not your actual taxable income after expenses. IRS.gov

Who receives it: Businesses, freelancers, contractors, and anyone who accepts payment cards or receives payments through third-party networks that meet the reporting thresholds (explained below).

Who files it: Payment settlement entities—this includes merchant acquiring banks (the banks that process your credit card transactions) and third-party settlement organizations like PayPal, Stripe, or Square.

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

For the 2017 tax year, payment settlement entities had specific deadlines: they were required to send Copy B to you by January 31, 2018, and file Copy A with the IRS by February 28, 2018 (or April 2, 2018, if filing electronically).

If you receive a late 1099-K: Don't wait for the form to file your tax return if the deadline is approaching. You should report your actual income based on your own records. If you later receive a 1099-K that differs from what you reported, and it results in additional tax owed, you may need to file Form 1040-X (Amended U.S. Individual Income Tax Return). IRS.gov

If you receive a corrected 1099-K: Contact the issuer immediately to understand the correction. If the corrected form shows different amounts than what you originally reported on your tax return, you'll generally need to file an amended return using Form 1040-X within three years of your original filing date. If you receive a corrected form before filing your original return, simply use the corrected information when you file.

If you receive an incorrect 1099-K: First, contact the payment processor who issued the form to request a corrected version. If they won't issue a correction and you disagree with the amount shown, you should still report it on your return but explain the discrepancy. Report the full 1099-K amount and then subtract the incorrect portion on Schedule 1 (Form 1040), providing clear documentation about why the adjustment is necessary. IRS.gov

Key Rules or Details for 2017

Reporting Thresholds

Reporting Thresholds: For the 2017 tax year, third-party settlement organizations (like PayPal or Venmo for business transactions) were only required to issue a Form 1099-K if both of the following conditions were met:

• Gross payments exceeded $20,000, AND
• There were more than 200 transactions

This is called the "de minimis" exception. However, payment card transactions (credit cards, debit cards) had no threshold—even a single credit card transaction was technically reportable, though in practice, payment processors typically applied the same thresholds across all payment types. IRS.gov

What's Included in Gross Amount

What's Included in Gross Amount: The dollar amount reported in Box 1a represents the total gross amount of all transactions without any deductions for:

• Credit card processing fees
• Refunds or chargebacks
• Adjustments or discounts
• Cash equivalents
• Any other fees or costs

This means the amount on your 1099-K will likely be higher than your actual taxable income. You'll account for business expenses, refunds, and fees when calculating your net income on Schedule C (for sole proprietors) or the appropriate business tax return.

Non-Reportable Transactions

Non-Reportable Transactions: Certain transactions are specifically excluded from 1099-K reporting:

• ATM withdrawals using a payment card
• Cash advances against a credit card
• Payments between related parties (as defined by IRS rules)
• Personal transactions (gifts, reimbursements between friends and family)

Foreign Payees

Foreign Payees: Payment settlement entities were generally not required to file Form 1099-K for payments to participants with foreign addresses, unless there were indicators of U.S. person status (such as a U.S. bank account, U.S. address on file, or transactions in U.S. dollars). IRS.gov

Step-by-Step (High Level)

For Recipients (Business Owners/Freelancers)

Step 1: Receive your Form 1099-K by late January or early February. Review it carefully when it arrives.

Step 2: Compare the gross amount on the form (Box 1a) with your own business records. The 1099-K shows total payment volume, not profit.

Step 3: Gather documentation for all business expenses, refunds issued, chargebacks, and processing fees throughout the year. These will offset the gross amount.

Step 4: Report your income on the appropriate tax form—typically Schedule C (Profit or Loss from Business) for sole proprietors. List the gross receipts, then deduct ordinary and necessary business expenses to arrive at your net profit.

Step 5: If the 1099-K amount differs significantly from your records due to errors, refunds, or non-taxable transactions, document the discrepancy and be prepared to explain it. You may need to attach a statement to your return.

Step 6: Keep the Form 1099-K with your tax records for at least three years (the general statute of limitations period for IRS audits).

For Issuers (Payment Settlement Entities)

Step 1: Identify all participating payees who met the reporting threshold ($20,000 and 200+ transactions for third-party networks; no threshold for payment cards).

Step 2: Calculate the gross amount of reportable transactions for each payee for the calendar year, broken down by month.

Step 3: Verify taxpayer identification numbers (TINs) for all payees to avoid backup withholding requirements.

Step 4: File Form 1099-K with the IRS by the deadline (February 28 for paper, April 2 for electronic filing in 2018).

Step 5: Provide Copy B to each payee by January 31 of the following year.

Step 6: If errors are discovered, file corrected forms as soon as possible, checking the "CORRECTED" box. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Treating the 1099-K amount as pure profit.

The biggest misconception is thinking the gross amount on Form 1099-K represents taxable income. This number includes processing fees, refunds, and doesn't account for business expenses. Solution: Always calculate your actual net income by subtracting legitimate business expenses. The 1099-K is just a starting point.

Mistake #2: Not reporting income because you didn't receive a 1099-K.

If your transactions fell below the threshold, you still earned taxable income. The IRS requires you to report all income, regardless of whether you received an information return. Solution: Keep meticulous records of all income and report it on your tax return even without a 1099-K.

Mistake #3: Ignoring discrepancies between your records and the 1099-K.

Differences can occur due to timing (transactions settling in different years), refunds, or errors. Simply ignoring these creates red flags for the IRS matching program. Solution: Document all discrepancies with supporting records. If necessary, include an explanation with your tax return or contact the issuer for a corrected form.

Mistake #4: Double-counting income.

Some business owners receive both Form 1099-K for payment card transactions AND Form 1099-MISC for the same work. After 2011, payments made by payment card should only be reported on 1099-K, not 1099-MISC. Solution: Review all forms carefully and track which income is reported where to avoid reporting the same income twice.

Mistake #5: Not keeping the form or supporting documentation.

Without proper records, you can't defend your tax return if questioned. Solution: Retain all Forms 1099-K and supporting documentation (bank statements, merchant statements, expense records) for at least three years.

Mistake #6: Failing to report personal transactions that appear on a 1099-K.

If your payment processor issued a 1099-K that includes personal transactions (like being reimbursed by friends), you can't simply ignore it—the IRS received a copy too. Solution: Report the amount from the 1099-K, then subtract the non-taxable portion on Schedule 1 (Form 1040) with a clear explanation like "Form 1099-K personal transactions reported in error." IRS.gov

What Happens After You File

Immediate Processing

Immediate Processing: After you file your tax return, the IRS enters your reported income into their computer system. They also receive copies of all Forms 1099-K directly from payment processors.

IRS Matching Program

IRS Matching Program: The IRS uses an automated system to match the income reported on your tax return against all information returns (including 1099-Ks) filed by third parties. This typically happens several months to over a year after you file.

If Everything Matches

If Everything Matches: You'll hear nothing from the IRS. No news is good news—your return was accepted as filed.

If There's a Discrepancy

If There's a Discrepancy: You may receive a CP2000 notice (Proposed Changes to Your Tax Return). This isn't technically an audit, but rather an automated notice pointing out that the IRS records show different income than you reported. You'll have the opportunity to respond, provide documentation, agree with the changes, or dispute them.

Refund Processing

Refund Processing: If you're owed a refund, receiving a 1099-K doesn't delay processing as long as you've reported the income properly on your return. Expect your refund within 21 days for e-filed returns with direct deposit.

Future Years Impact

Future Years Impact: The IRS now has your information on file as someone who receives payment card or third-party network payments. They'll expect to see this income reported in future years, creating a compliance footprint.

State Tax Considerations

State Tax Considerations: Many states participate in the Combined Federal/State Filing Program, meaning they automatically receive 1099-K information too. Ensure your state tax return reflects the same income. IRS.gov

FAQs

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

No. Unlike a W-2, you don't attach Forms 1099-K to your return. Keep them with your tax records. The IRS already has a copy sent directly by the payment processor. You simply report the appropriate income amounts on the relevant lines of your tax forms (typically Schedule C for self-employment income).

Q2: What if the amount on my 1099-K includes credit card processing fees that were deducted before I received payment?

The gross amount on Form 1099-K includes everything before fees. You should report your gross receipts and then deduct the processing fees as a business expense on Schedule C (or the appropriate business expense category). This ensures you're only taxed on your net income after legitimate business costs.

Q3: I received a 1099-K but some of the transactions were refunded to customers. How do I handle this?

Report your gross receipts as shown on the 1099-K, then deduct returns and allowances as a separate line item on Schedule C. Keep documentation of all refunds issued. The 1099-K reports total payment volume regardless of refunds, but your taxable income properly accounts for what you actually kept.

Q4: What's the difference between Box 1a and Box 1b on the form?

Box 1a shows the gross amount of all payment card and/or third-party network transactions. Box 1b specifically breaks out "card not present" transactions—these are typically online, phone, or mail-order sales where the physical card wasn't swiped. Box 1b is informational; you still use Box 1a for your total gross receipts.

Q5: Can I be penalized for discrepancies between my 1099-K and my tax return?

Not if you can document legitimate reasons for differences. Discrepancies due to refunds, business expenses, timing differences, or errors aren't penalties if properly explained. However, if you fail to report income shown on a 1099-K without explanation, you could face underreporting penalties and interest on unpaid taxes.

Q6: I used PayPal for both business and personal transactions. Should everything on my 1099-K be reported as income?

No. Only business income is taxable. If your payment processor included personal transactions (like receiving reimbursement from friends), you should report the full 1099-K amount and then subtract the personal portion on Schedule 1 (Form 1040), line 8z as "Form 1099-K Personal Transactions Reported in Error," and line 24z with the same description but as a negative amount. Better yet, contact the payment processor for a corrected form. IRS.gov

Q7: What happens if I never receive a 1099-K but I know I should have gotten one based on my transaction volume?

You're still required to report all income, even without the form. Use your own business records to calculate gross receipts and report them appropriately. The absence of a 1099-K doesn't eliminate your obligation to report income. If you're concerned, contact your payment processor to verify whether one was issued or if your address information was incorrect.

Additional Resources

Important Note: This summary is based on rules in effect for the 2017 tax year. Form 1099-K reporting thresholds and requirements have changed in subsequent years. Always consult current IRS guidance or a tax professional for the most up-to-date information specific to your situation.

Official IRS Resources:

2017 Form 1099-K Instructions (IRS.gov)
2017 Form 1099-K (IRS.gov)
Current Form 1099-K Information

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