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 contributions to retirement accounts
- Form W2-G, which documents gambling winnings
- Forms 3921 and 3922, which document transactions related to incentive stock options and employee stock purchases
Since Tax Year 2010 there has been a new form in the 1099 series. 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.
Things to Watch Out For
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.
For Tax Year 2013, the program which IRS used to screen for obvious errors in format or content of electronic filings included a check of the dollar amounts. If the sum of monthly payments (Boxes 5a through 5i) did not match the annual total of payments (Box 1a) the entire electronic filing was rejected – including all forms in that transmission, not just the Forms 1099-K.
Having a filing rejected is not a major problem as long as the errors cited can be corrected quickly and resubmitted promptly. In this case we’ve chosen to address the problem at its source. Accordingly, our data importing programs and on-line update screens do not accept a value for Box 1a. Instead, that value is calculated as the sum of Boxes 5a through 5l.
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 www.irs.gov 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.