New Kid on the Block: Form 1099-K

IRS information returns assist IRS in verifying elements of a taxpayer’s return. We generally refer to these documents as the “1099 family” of returns. The family includes:

  • Forms in the 1098 series, which document transactions which may be deductible from the payer’s income.
  • Forms in the 1099 series, which document transactions which may be taxable to the recipient.
  • Forms in the 5498 series, which document transactions related to retirement accounts – both contributions and withdrawals.
  • Form W2-G, which documents gambling winnings
  • Forms 3921 and 3922, which document transactions related to incentive stock options and employee stock purchases
  • Form 8935, which documents payments to certain employees of bankrupt airlines.
Enter 1099-K

For the Tax Year 2010 there is a new form in the 1099 series.  As of this writing, IRS has not posted the final instructions or the form itself, but if you collect payments from buyers, accumulate them and pass them on to sellers, you may be required to issue Form 1099-K to the seller for Tax Year 2011 and beyond.

The requirement to issue a 1099-K applies only if you process more than 200 transactions and those transactions add up to more than $20,000 in a given year. The form itself contains only dollar figures, but the data you extract from your accounting system should also include transaction counts. Otherwise you will be unable to identify which payees need to be issued a 1099-K.

Things to Watch Out For

Even though the final Form 1099-K and its instructions have not yet been issued, the specs for filing form 1099-K electronically have been published as IRS Publication 1220. Changes to Publication 1220 this late in the year are possible, but unlikely. IRS has also posted a draft of the form itself. That and a little help from the folks at IRS’s Information Returns Branch lets us get a pretty good handle on the information we’ll need to process 1099-Ks.

Type of 1099-K Filer

The filer (that’s you) needs to be identified as one of three types:

  • A Payment Settlement Entity (PSE) is typically a bank which issues credit or debit cards.
  • A Third Party Payer (TPP) is an organization that has a contractual obligation to make payments to participating payees of their party network transactions
  • An Electronic Payment Facilitator (EPF) is a specific type of Third Party Payer.

The form mailed to payees lumps the third party payer types together. There are two check boxes on the form, one for PSE and one for TPP/EPF. The electronic filing format, on the other hand, distinguishes between all three, having separate codes for PSE, TPP, and EPF.

If you are a TPP or EPF, you will also have to know (for each payee) who the PSE is. Both the printed (draft) form and the electronic filing spec provide a place to record the name of the PSE.

Merchant Category Codes

Box 2 on the draft form should contain the payee’s Merchant Category Code. A list of these four-digit codes can be found at under Internal Revenue Bulletin  2004-3.

The electronic filing spec lists Merchant Category Code as a required field. What it does not say is what the consequences of not providing the code might be. But the required field designation suggests that it might be worth some effort to obtain Merchant Category Codes for payees.

The 1099 Connection Advantage

The amounts reported on Form 1099-K represent real income to payees, income which is likely to be taxable. It’s reasonable to expect that payees will compare your 1099-K to their records and challenge figures they believe to be in error. If they’re right, 1099 Connection’s simple and straightforward correction facility can make handling the error quick and easy.