Form 1099-K: Merchant Card and Third Party Network Payments (2015)

What Form 1099-K Is For

Form 1099-K is an information return issued by payment settlement entities to report payments received through payment cards (credit cards, debit cards, gift cards) or third-party payment networks (like PayPal or other payment processors). If you accept credit cards in your business or receive payments through online payment platforms, you may receive this form showing the total gross payments you received during the year.

The form was created under Internal Revenue Code section 6050W to help the IRS track income that might otherwise go unreported. Think of it as similar to the W-2 your employer sends you—it's a way for the IRS to verify that income is properly reported on tax returns. Payment settlement entities (PSEs)—including merchant acquiring banks, credit card processors, and third-party settlement organizations—are responsible for issuing this form to merchants and service providers. IRS.gov

It's important to understand that Form 1099-K reports gross payments, meaning the total before any deductions for fees, refunds, chargebacks, or business expenses. This is not your taxable income—it's simply the total amount of transactions processed through these payment channels.

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

You typically receive Form 1099-K by February 1 following the tax year being reported. For 2015 transactions, you would have received the form by February 1, 2016. If you discover errors on your Form 1099-K after receiving it, contact the payment settlement entity (the company listed in the upper-left corner of the form) immediately to request a corrected version.

The PSE, not you, files Form 1099-K with the IRS, so you don't file this form yourself—you receive it. However, if you notice discrepancies between the 1099-K amounts and your actual business income, you'll need to reconcile these differences on your tax return. Late or amended Forms 1099-K would be issued by the PSE if they discover they reported incorrect information. As a recipient, you would then use the corrected form when preparing or amending your tax return.

If you need to amend your personal tax return because you discovered you underreported income shown on Form 1099-K, you would file Form 1040-X (Amended U.S. Individual Income Tax Return). The IRS has established procedures for correcting information returns, and proper documentation showing how you calculated your reported income is essential for resolving any discrepancies. IRS.gov

Key Rules or Details for 2015

For the 2015 tax year, specific thresholds determined whether a payment settlement entity was required to issue you a Form 1099-K:

Payment Card Transactions (Credit/Debit Cards)

There is no minimum threshold for payment card transactions. If you accepted any payment cards, the merchant acquiring entity must report all those transactions, regardless of amount. This includes transactions at physical locations where cards are swiped and "card not present" transactions (online, phone, or mail orders where the card number is manually entered). IRS.gov

Third-Party Payment Networks

For third-party settlement organizations, Form 1099-K is required only if both of these conditions are met:

• Total payments exceed $20,000 in gross volume, AND
• More than 200 separate transactions occurred

This "de minimis" exception means that if you received $25,000 through a payment network but only had 150 transactions, you wouldn't receive a 1099-K. Conversely, if you had 250 transactions totaling $15,000, you also wouldn't receive one—both thresholds must be exceeded. IRS.gov

Coordination with Form 1099-MISC

Important note: Payments made by payment card or through third-party networks that would otherwise require a Form 1099-MISC (for independent contractors) are reported on Form 1099-K instead, not on both forms. This prevents duplicate reporting of the same income. IRS.gov

Step-by-Step (High Level)

Understanding Form 1099-K involves several straightforward steps:

Step 1: Receive the Form

By February 1, 2016 (for tax year 2015), payment processors must send you Form 1099-K if you met the reporting thresholds. You'll receive Copy B for your records and possibly Copy 2 if your state requires it. IRS.gov

Step 2: Review for Accuracy

Check Box 1a, which shows the gross amount of all payment card and third-party network transactions. Verify this matches your records. Review Box 1b (Card Not Present transactions) and Box 3 (number of transactions) to ensure accuracy. Check that your identifying information (name, address, taxpayer ID) is correct.

Step 3: Reconcile with Your Records

The amount in Box 1a is gross receipts before any deductions. Compare it to your business income records, accounting for payment processor fees, refunds, chargebacks, and returns that may not be reflected in the 1099-K amount.

Step 4: Report on Your Tax Return

Report your business income on the appropriate form (Schedule C for sole proprietors, Form 1120 for corporations, etc.). You report your actual net income, not necessarily the 1099-K amount. If they differ, be prepared to explain the difference—keeping detailed records of fees, refunds, and other adjustments.

Step 5: Retain Documentation

Keep Form 1099-K with your tax records for at least three years. Also maintain documentation showing how you arrived at your reported income figures, including records of processor fees, refunds, and business expenses. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Reporting the Full 1099-K Amount as Income

Many taxpayers mistakenly think the gross amount in Box 1a is their taxable income. The 1099-K shows gross payments before expenses, fees, refunds, and returns. Your taxable income is what remains after legitimate business deductions. Solution: Keep meticulous records of all processor fees, refunds, and business expenses to calculate actual net income.

Mistake #2: Ignoring Forms from Multiple Payment Processors

If you use multiple payment methods (Visa/Mastercard processor, multiple third-party networks), you may receive multiple 1099-K forms. Solution: Add up all forms and reconcile the total with your gross receipts. Don't accidentally omit income from one processor.

Mistake #3: Not Reconciling Personal vs. Business Transactions

If you use payment apps for both business and personal transactions (receiving gifts, splitting bills with friends), the 1099-K may include non-business amounts. Solution: Maintain separate accounts for business and personal use, or keep detailed records identifying which transactions were personal.

Mistake #4: Misunderstanding "Card Not Present" Reporting

Box 1b (mandatory for 2015) specifically reports online, phone, or mail-order transactions. This isn't a separate income category—it's included in Box 1a and simply provides additional detail. Solution: Don't double-count these amounts; they're already included in your total gross receipts. IRS.gov

Mistake #5: Failing to Contact the PSE About Errors

If your 1099-K is incorrect, you cannot simply adjust it yourself. Solution: Contact the payment settlement entity immediately to request a corrected form. They must file a corrected Form 1099-K with the IRS if there were errors. IRS.gov

What Happens After You File

Form 1099-K is primarily an information-sharing mechanism between payment processors and the IRS. Once PSEs file these forms (by February 29, 2016 for paper filing or March 31, 2016 for electronic filing), the IRS receives a copy of every form issued. IRS.gov

The IRS uses computer matching programs to compare the income reported on your tax return against all 1099 forms (including 1099-K) filed under your taxpayer identification number. If there's a significant discrepancy—for example, you reported $50,000 in business income but your 1099-K shows $80,000 in gross receipts—the IRS may send you a notice requesting an explanation.

This doesn't necessarily mean you're in trouble. Legitimate reasons for differences include processor fees (which reduce your actual income), refunds to customers, chargebacks, and credits. If you receive an IRS notice, respond promptly with documentation showing how you calculated your reported income.

Payment settlement entities that fail to file required Forms 1099-K or that file incorrect information may face penalties under sections 6721 and 6722 of the Internal Revenue Code. The key is maintaining thorough records and being able to reconcile the gross 1099-K amount with your reported net business income through documented business expenses, fees, and adjustments. IRS.gov

FAQs

Q1: I received a 1099-K but I'm not a business—what do I do?

If you received payments through a payment app for personal reasons (like roommates paying you rent, friends reimbursing you for concert tickets, or receiving birthday gifts), these aren't taxable income. Contact the payment settlement entity to discuss whether you can exclude these going forward. For 2015, if the amounts are substantial, you may need to document that these were personal, not business, transactions when filing your tax return.

Q2: The amount on my 1099-K doesn't match my bank deposits—is this a problem?

This is common and not necessarily a problem. The 1099-K shows the gross transaction amount before processor fees are deducted. Your bank deposits will be less than the 1099-K amount due to fees charged by the payment processor. Keep records of all fees charged so you can reconcile the difference. These fees are deductible business expenses.

Q3: Do I need to attach Form 1099-K to my tax return?

No. Form 1099-K is for your records and for the IRS's information matching program. You don't attach it to your tax return. Simply report your business income on Schedule C (or the appropriate business tax form), calculated using your accounting records. IRS.gov

Q4: I have transactions in foreign currency—how are those reported?

Foreign currency transactions are converted to U.S. dollars using the spot rate on the date of each transaction (or a reasonable spot rate convention like month-end rates, applied consistently). The PSE handles this conversion when preparing your 1099-K, so the amounts you see are already in U.S. dollars. IRS.gov

Q5: What if I operate both online and brick-and-mortar sales?

You may receive one or multiple 1099-K forms depending on how your payment processing is structured. If one PSE handles both types, you'll receive one form. Box 1b will specifically show "card not present" transactions (online sales). Box 1a shows the combined total. Report the total business income from all sources on your tax return.

Q6: Can the IRS backup withhold on 1099-K payments?

Yes. If you failed to provide a correct taxpayer identification number (TIN) to the payment processor, they may withhold from payments for backup withholding and report this in Box 4. This withheld amount is credited toward your tax liability when you file your return. To avoid this, always provide accurate TIN information on Form W-9 when requested. For third-party settlement organizations, backup withholding only applies if you have received payment in more than 200 transactions within a calendar year. IRS.gov

Q7: What's the difference between a payment settlement entity and an electronic payment facilitator?

A payment settlement entity (PSE) has the contractual obligation to make payments to you. An electronic payment facilitator (EPF) is a third party that the PSE contracts with to actually process the payments. If an EPF is involved, they typically file the 1099-K instead of the PSE, though the PSE's information appears on the form. As the payee, you'll see which entity filed in the checkboxes on the form. IRS.gov

This summary is based on the 2015 IRS Form 1099-K instructions and forms available at IRS.gov. Tax laws change regularly, so consult current IRS guidance or a tax professional for the most up-to-date information.

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