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1099-K Tax Basics

Last Updated:
March 30, 2017

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.

What is a 1099-K form?

1099-K

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, you must issue a copy to the payment recipient and file with the IRS.

See more information about What is a 1099-MISC?

Who files a 1099-K form?

Let’s go into more detail about who files a 1099-K. These types of organizations will 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:

  • Merchant Acquiring Entity (MAE): a merchant acquiring entity is a type of PSE that has the contractual obligation to make a payment to a merchant (e.g., Target) in settlement of a payment card transaction.
  • Third-Party Settlement Organization (TPSO): an agreement where a third party handles payments between someone providing goods/service and the purchaser.

What companies and organizations qualify as a TPSO?

In general, a company must meet certain requirements to be considered a TPSO. Those requirements include:

  • The establishment of accounts by a significant number of unrelated parties.
  • An agreement between the organization and the sellers to settle payment transactions.
  • The establishment of standards and mechanisms for settling the transactions.
  • The organization's guarantee that the provider will be paid.

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 world of money transferring and business payments are changing, so too are the ways of reporting it. When in doubt about your particular situation, it’s best to get advice from a tax advisor.

Who receives a 1099-K?

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.

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 2016 payments, you’ll need to send recipients 1099s by January 31, 2017. You also must send a copy to the IRS. If you’re filing by mail, the deadline is February 28, 2017. But, if filing electronically, the deadline is March 31, 2017. Just to put that in another handy format:

  • January 31, 2017 -- Send 1099 form to recipients
  • February 28, 2017 -- Mail 1099-K forms to the IRS

OR

  • March 31, 2017 -- E-file 1099-K forms with the IRS via FIRE

Extensions

See our guide to requesting a delivery extension which will give you an extra 30 days to deliver forms to recipients.

See our guide to requesting a filing extension which will give you an extra 30 days to file forms with the IRS.

State filing considerations for 1099-K

Keep in mind that your state may also have requirements and separate deadlines for reporting 1099-Ks and filing them.

Mailing vs. E-Filing 1099-Ks with the IRS

If you’re issuing more that 250 1099 forms, then you’re actually required to e-file with the IRS. And even if you plan on filing fewer than 250, the IRS actually prefers e-filing.

Should you issue a 1099-MISC or 1099-K?

1099-MISC

Most of the time, businesses issue their contractors 1099-MISCs, which are used for direct payments to contractors for business services. As mentioned above, the threshold for sending a 1099-MISC is if you’ve paid them over $600 over the course of the year.

See more information about Form 1099-MISC Basics

1099-K

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 like Paypal 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.

Processing options

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 contractor 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 contractors.

Hire a CPA or professional tax advisor: They will 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.

Penalties for not filing

If you neglect to file 1099s when you should or file too late, then you could face some hefty fines. Depending on how late you file, you can face 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).

1099-K Box-by-Box Guide

1099-K Box by Box

1099-K IRS Helpful Links

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:

Filer Instructions:

Forms (includes recipient instructions):

General FAQ (includes some great tidbits on who is required to file, MISC/K questions for when payments are made to independent contractors, etc...)

Third-Party Network FAQ   

Understanding Your Form 1099-K” article IRS put out to help recipients understand these forms

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