Form 1099-K: Merchant Card and Third Party Network Payments – 2016 Guide
Understanding your tax forms doesn't have to be complicated. Form 1099-K is one of those documents you might receive if you accept credit cards or get paid through platforms like PayPal, and this guide will walk you through everything you need to know about this form for the 2016 tax year.
What Form 1099-K Is For
Form 1099-K is an information return that reports payments you received through credit cards, debit cards, or third-party payment networks during the calendar year. Think of it as a receipt from your payment processor showing the IRS how much money flowed through your merchant account or payment platform.
The form exists because of Section 6050W of the Internal Revenue Code, which requires payment settlement entities (PSEs) – such as banks that process your credit card transactions or companies like PayPal and Stripe – to report payment card and third-party network transactions to both you and the IRS. These entities act as middlemen between you and your customers, and they're responsible for tracking and reporting these payments. IRS
You'll receive Form 1099-K if you accepted payment cards (credit, debit, or stored-value cards like gift cards) for your business, or if you received payments through a third-party payment network. The form shows the gross amount of payments you received before any fees, refunds, or other adjustments were subtracted. This is crucial information because the IRS uses it to ensure you're reporting all your business income on your tax return.
It's important to understand that Form 1099-K doesn't mean you automatically owe taxes on the full amount shown. The form simply reports the total payments that came through these channels – it's up to you to calculate your actual taxable income by subtracting legitimate business expenses, cost of goods sold, refunds, and chargebacks.
When You’d Use Form 1099-K (Filing, Late Filing, and Amended Returns)
For Payment Processors
If you're a payment settlement entity required to file Form 1099-K, you must furnish Copy B to the payee by January 31, 2017 (for the 2016 tax year). You must file Copy A with the IRS by February 28, 2017 if filing on paper, or by March 31, 2017 if filing electronically. IRS
For Recipients
When you receive your Form 1099-K, you don't file it with your tax return – instead, you use the information on it to help you complete your income tax return. The amounts reported on Form 1099-K should be reflected in the gross receipts or sales you report on your Schedule C (for sole proprietors), Schedule E (for rental income), or your business tax return (Form 1120, 1120-S, or 1065).
Late Filing
If a payment processor files late, they may face penalties under sections 6721 and 6722 of the tax code. As a recipient, if you don't receive your Form 1099-K by mid-February, contact the filer (the payment processor) shown on any previous forms, or check with your payment processor directly.
Corrected Returns
If you receive a Form 1099-K that contains incorrect information – wrong amounts, incorrect taxpayer identification number, or erroneous transactions – contact the filer immediately. They can issue a corrected Form 1099-K, which will have the "CORRECTED" box checked at the top. The filer must submit corrected forms to both you and the IRS. Don't amend your own tax return until you receive the corrected form showing the accurate information.
Key Rules or Details for 2016
Payment Card Transactions
There is no minimum threshold for payment card transactions. If you accepted even one dollar through credit cards, debit cards, or stored-value cards, the payment processor is technically required to report it on Form 1099-K. However, in practice, most processors only send forms for accounts with meaningful activity.
Third-Party Network Transactions
For payments received through third-party payment networks (like PayPal, Venmo for business, or similar platforms), you'll only receive Form 1099-K if you meet both of these requirements:
- Your gross payments exceeded $20,000 for the calendar year, AND
- You had more than 200 separate transactions IRS
Foreign Transactions
The 2016 rules include specific exceptions for payments made outside the United States. Generally, payment processors don't need to file Form 1099-K for payments to foreign accounts unless there's a U.S. address associated with the account, standing instructions to transfer funds to a U.S. bank account, the payee requests payment in U.S. dollars, or the processor knows the payee is a U.S. person.
Non-Reportable Transactions
Not every transaction counts. ATM withdrawals, cash advances against your card, checks issued in connection with payment cards, and transactions where the merchant and card issuer are related companies are all excluded from Form 1099-K reporting.
Gross Amount Reporting
The form reports the gross amount of transactions without any deductions. This means fees charged by the payment processor, refunds you issued to customers, chargebacks, discounts, and other adjustments are not subtracted from the amount shown in Box 1a.
Step-by-Step (High Level)
Step 1: Receive and Review the Form
You should receive Form 1099-K by late January or early February. When it arrives, carefully review all the information: your name, taxpayer identification number (which may be truncated to show only the last four digits for security), and the payment amounts shown.
Step 2: Verify the Gross Amount
Look at Box 1a, which shows the gross amount of all payment card or third-party network transactions for 2016. Compare this to your own records. Remember, this is the total amount of payments received, not your net income. Box 1b may show "card not present" transactions (like online or phone sales) if applicable.
Step 3: Reconcile with Your Records
Pull out your own bookkeeping records and match them against the Form 1099-K. Look at the monthly breakdown in Boxes 5a through 5l to identify any discrepancies. Check Box 3, which shows the number of transactions, against your records.
Step 4: Calculate Your Actual Income
The amount on Form 1099-K is almost certainly higher than your actual taxable income. You need to subtract legitimate business expenses, the cost of goods sold, refunds issued to customers, chargebacks, payment processing fees, and any personal transactions that were incorrectly included. Keep detailed records of all these adjustments.
Step 5: Report on Your Tax Return
Include the income from Form 1099-K (along with any other business income) on the appropriate tax form – typically Schedule C for sole proprietors, Schedule E for rental properties, or corporate tax returns for incorporated businesses. You don't attach the Form 1099-K to your return, but keep it with your tax records.
Step 6: Handle Discrepancies
If you find errors on your Form 1099-K, contact the filer (the payment processor) immediately. Request a corrected form before filing your tax return if possible. If you can't get a correction, you may need to attach a statement to your tax return explaining the discrepancy and showing the correct amounts based on your records.
Common Mistakes and How to Avoid Them
Mistake #1: Reporting the Gross Amount as Taxable Income
Many business owners mistakenly think they owe taxes on the full amount shown in Box 1a. This is incorrect. The form shows gross receipts before any deductions. Solution: Track all your business expenses, fees, refunds, and cost of goods sold throughout the year, and subtract these from your gross receipts to arrive at your actual taxable income.
Mistake #2: Confusing Personal and Business Transactions
Sometimes Form 1099-K includes personal transactions, especially if you received money from friends or family through payment apps, or sold personal items at a loss. Solution: Carefully review all transactions and document which ones were personal. Contact the payment processor to correct the form if substantial personal amounts were included. For items sold at a loss (like used furniture or clothing), keep records showing you sold them for less than you originally paid.
Mistake #3: Incorrect Taxpayer Identification Number
Providing the wrong Social Security Number or Employer Identification Number to your payment processor will cause problems. The IRS won't be able to match the Form 1099-K to your tax return, potentially triggering notices. Solution: Verify that your payment processor has your correct TIN on file. If you see "2nd TIN not." checked on your form, address this immediately with the IRS and your payment processor. IRS
Mistake #4: Ignoring Foreign Currency Conversions
If you received payments in foreign currency, they must be converted to U.S. dollars using the spot rate on the transaction date or a consistent reasonable convention (like monthly average rates). Solution: Establish a consistent currency conversion method and apply it uniformly. Document your conversion method in case of an audit.
Mistake #5: Failing to Account for Multiple Forms
If you use multiple payment processors or have both payment card and third-party network transactions with the same processor, you might receive multiple Forms 1099-K. Solution: Keep all forms organized and ensure you're reporting the total income from all sources without duplicating or omitting any amounts.
Mistake #6: Not Keeping the Form with Tax Records
Even though you don't file Form 1099-K with your return, you need to keep it for your records. Solution: Store Form 1099-K with your tax return documentation for at least seven years in case of an audit.
What Happens After You File
IRS Matching Process
The IRS uses automated systems to match the income reported on your tax return against the Forms 1099-K (and other information returns) filed by payment processors. If the gross receipts on your return seem substantially lower than the amounts on Forms 1099-K, this may trigger an inquiry.
Potential IRS Notices
If there's a significant discrepancy between what payment processors reported and what you reported on your return, you might receive an IRS notice – typically a CP2000 notice indicating "underreported income." Don't panic if you receive one. These notices give you the opportunity to explain the difference (such as refunds, fees, and business expenses that reduced your gross receipts to net income).
Response Requirements
If you receive a notice, respond promptly with documentation showing your actual income calculations. Provide detailed records of business expenses, payment processing fees, refunds, chargebacks, and any personal transactions that should be excluded. The IRS generally gives you 30-60 days to respond.
Backup Withholding
If you didn't provide your taxpayer identification number to the payment processor, or if the IRS notified the processor that you provided an incorrect TIN, the processor may have withheld 28% of your payments for backup withholding. This would be shown in Box 4 of Form 1099-K. If backup withholding occurred, you'll claim credit for these amounts on your tax return, just like regular tax withholding. IRS
State Tax Implications
Most states that have income taxes also receive Form 1099-K information. Boxes 6-8 on the form may show state-specific information. Ensure that your state tax return is consistent with your federal return regarding this income.
Record Retention
Keep your Form 1099-K and all supporting documentation (bank statements, payment processor statements, refund records, expense receipts) for at least seven years. If the IRS questions your return, you'll need these records to substantiate your reported income and deductions.
FAQs
Q1: I received a Form 1099-K, but I'm not a business. What should I do?
A: This happens occasionally, especially with third-party payment networks. First, review the transactions to determine if any were actually business-related (even occasional selling on platforms like eBay or Etsy counts as business activity). If the transactions were purely personal – like reimbursements from friends or selling used personal items at a loss – contact the payment processor to request a corrected form. If that doesn't work, you'll need to report the income on your tax return but may be able to offset it with explanations and documentation showing it wasn't taxable business income.
Q2: The amount on my Form 1099-K doesn't match my bank deposits. Is something wrong?
A: Not necessarily. Form 1099-K reports the gross payment amount before the payment processor deducts their fees, before any chargebacks, and before accounting for refunds. Your bank deposits will be lower because fees were taken out. Additionally, the form reports on a transaction date basis, while your bank deposits might be dated when the funds actually settled (which could be days later). Reconcile carefully by looking at your payment processor statements, which should bridge the gap between the Form 1099-K amount and your actual deposits.
Q3: Do I need to report Form 1099-K income if it's below the third-party network threshold?
A: Yes! The $20,000/200 transaction threshold only determines whether the payment network must send you (and the IRS) a Form 1099-K. All business income is taxable and must be reported on your tax return, regardless of whether you receive a Form 1099-K. If you earned $15,000 through PayPal but didn't receive a Form 1099-K because you didn't meet the threshold, you still must report that $15,000 as business income.
Q4: Can I be penalized if the Form 1099-K is incorrect and I report different amounts?
A: You shouldn't be penalized if you report the correct income based on your accurate records, even if it differs from Form 1099-K. However, you must be able to document and explain the difference. Keep detailed records showing why the Form 1099-K amount differs from your reported income (fees, refunds, personal transactions, etc.). If the IRS questions the discrepancy, you'll need this documentation to avoid penalties.
Q5: What if I have both payment card transactions and third-party network payments?
A: Your payment processor must file separate Forms 1099-K for each type of transaction, or clearly identify both types on a single form using the checkboxes. Payment card transactions have no minimum threshold, while third-party network transactions require meeting the $20,000/200 transaction rule. Make sure you account for all forms you receive when preparing your tax return.
Q6: How do refunds and chargebacks affect Form 1099-K reporting?
A: They generally don't. Form 1099-K reports the gross amount of transactions without subtracting refunds or chargebacks. This means if you processed $50,000 in payments but issued $5,000 in refunds, your Form 1099-K will show $50,000. You need to track refunds and chargebacks separately in your records and account for them when calculating your actual taxable income on your tax return.
Q7: I received Form 1099-K after I already filed my taxes. What should I do?
A: First, check whether the income reported on the Form 1099-K is already included in the gross receipts you reported on your tax return. If you properly reported all your income but just didn't have the form yet, you're fine – no action needed. If you failed to report income that's shown on the form, you'll need to file an amended return (Form 1040-X for individuals) to correct your tax return and report the additional income. File the amendment promptly to minimize potential penalties and interest.
Additional Resources
For More Information: Visit IRS.gov/Form1099K for the latest updates, or call the IRS information reporting customer service at 1-866-455-7438 if you have specific questions about your situation.
