The form 1099-K was introduced into law in 2008 and didn’t go into effect until 2011- it’s by far the youngest of the 15 different types of 1099 forms. And since its introduction, the form has caused a good deal of confusion.
As with many IRS forms, compiling and filing 1099-Ks is more complex than it sounds: it requires understanding specific contractual arrangements and the roles each party plays in the payment process. We’ve put together this overview to help you understand the basics of the process and its requirements.
The 1099-K is used to report payments processed by payment settlement entities (PSEs). A PSE comes in two forms, either a third-party settlement organization also referred to as a TPSO or merchant acquiring entity, MAE, (like banks). A third-party payment network is also a type of entity responsible for issuing form 1099-K. When using a 1099-K for information reporting, a copy must be issued to the payment recipient and filed with the IRS.
Let’s go into more detail about who files a 1099-K. These types of organizations issue a 1099-K to any providers of goods and services:
Payment Settlement Entity (PSE): an organization that facilitates payments between parties for payment cards or third party payment networks. There are two types of PSEs:
What companies and organizations qualify as a TPSO?
In general, a company must meet certain requirements to be considered a TPSO. Those requirements include:
Third-party settlement organizations (TPSOs) and third-party payment networks are only required to issue a 1099-K after processing over 200 transactions and paid out over $20,000 to the payee over the course of a year.
There’s still a lot of gray area surrounding the obligation to file and issue 1099-Ks. The form is relatively new and as the worlds of money transferring and business payments are changing, so too are the ways of reporting. When in doubt about your particular situation, it’s best to get advice from a tax advisor.
Recipients of a 1099-K are mostly vendors who have received payment using a TPSO or third-party payment network. An Etsy seller, for example, would receive a 1099-K from Etsy as Etsy has concluded it satisfies the criteria for a TPSO.
The seller would also need to meet the minimum 1099-K thresholds of processing 200 transactions and $20,000 in gross volume.
Whether the payee (vendor or contractor) receives a 1099-K or not, they are still required to report that income to the IRS and pay taxes accordingly.
For current year payments, 1099-Ks must be sent to recipients by January 31, of the following year. Copies of each 1099 issued must be sent to the IRS. If filed by mail, the deadline is February 28 (or the last day of February). But, if filing electronically, the deadline is March 31. Just to put that in another handy format:
March 31 -- E-file 1099-K forms with the IRS via FIRE
See our guide to requesting a delivery extension which explains how to request an extra 30 days to deliver forms to recipients.
See our guide to requesting a filing extension which explains how to request an extra 30 days to file forms with the IRS.
Keep in mind that your state may also have requirements and separate deadlines for reporting 1099-Ks and filing them. You should talk with your tax advisors to understand your state filing requirements.
Anyone issuing more that 250 1099 forms is required to e-file with the IRS. Even if less than 250 are being filed, the IRS actually prefers e-filing.
Most of the time, businesses issue their contractors 1099-MISCs, which are used for direct payments to contractors for business services. The threshold for sending a 1099-MISC is if a contractor has been paid over $600 over the course of the year.
As online and digital payments become more pervasive, many companies may need to issue a Form 1099-K, which is typically reserved for electronic payments and payments by credit card to contractors. Traditionally, third-party settlement organizations have used this form to report payment transactions.
The reporting threshold for 1099-Ks is much higher than for 1099-MISC. Third-party settlement organizations are required to issue a 1099-K after 200 transactions and paying out over $20,000.
It’s important to begin planning for 1099 filing and delivery early because it can easily turn into a huge headache if the deadline rolls around while you’re still missing important recipient or payments information. We suggest starting to prepare as early as possible and be aware of your options:
Handle filing and delivery on your own: With this option, you compile, print, deliver, and file all the 1099s on your own. You’d probably want to consider this option if you expect to organize and issue very few 1099s.
1099-K Filing Service: Services like Payable exist to help you with this process of gathering information and filing. This is ideal for companies with dozens to thousands of recipients.
Hire a CPA or professional tax advisor: They can help determine whether you have a reporting obligation for payments made to contractors and may prepare the forms for you. They typically will handle filing with the IRS as well.
*When in doubt at any stage of the 1099 process, it’s good to consult a tax advisor to better understand your requirements.
If you neglect to file 1099s when you should or file too late, then you could face some hefty fines. Depending on how late 1099s are filed, penalties range anywhere from $50-$260 per failure, per form, with a maximum of $3,193,000 per failure. In other words, a payor can be assessed $260 per form for failure to file with the IRS and $260 for failure to furnish the same form to the payee (for a maximum of $6.3 million).
It’s hard to find the most relevant and up-to-date IRS information on 1099 taxes on the internet these days. So, we’ve gathered the best, most authoritative information here:
Forms (includes recipient instructions):
General FAQ (includes useful tidbits on who is required to file, MISC/K questions for when payments are made to independent contractors, etc...)
Understanding Your Form 1099-K (article IRS put out to help recipients understand these forms)
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