Form 1099-K Frequently Asked Questions: Definitions

A. Form 1099-K, Payment Card and Third Party Network Transactions, is an information return that reports the gross amount of reportable transactions for the calendar year to the IRS. See Understanding Your Form 1099-K for more information.

A. The term “payment card” includes credit cards, debit cards, and stored-value cards (including gift cards), as well as payment through any distinctive marks of a payment card (such as a credit card number).

A payment card is issued according to an agreement that provides all of the following: one or more issuers of the cards; a network of persons unrelated to each other, and to the issuer, who agree to accept the cards as payment; and standards and mechanisms for settling the transactions between a merchant acquiring entities and the persons who accept the cards as payment.

A. An MCC is a four-digit number used by the payment card industry to classify businesses by the goods or services they provide. There are approximately 600 MCCs, representing different types of businesses. Some examples are: 4411- Cruise Lines; 5462 - Bakeries; and 5532 - Automotive Tire Stores

A. The Internal Revenue Code uses the term “third party settlement organization.” A third party settlement organization is the central organization that has the contractual obligation to make payments to participating payees (generally, a merchant or business) of third party network transactions. An example could include apps used to handle the money transfer between buyers and sellers.

A. Characteristics of a third party payment network include:

• the existence of a central organization with whom a substantial number of providers of goods and services (who are unrelated to the central organization) have established accounts,
• an agreement between the central organization and the providers to settle transactions between the providers and purchasers,
• the establishment of standards and mechanisms for settling such transactions, and
• the guarantee of payment in settlement of such transactions.

An example of a third party settlement organization is an online auction payment facilitator like an online marketplace, which operates as an intermediary between buyer and seller by transferring funds from the buyer to the seller for the provision of goods or services and otherwise meets the characteristics described in the bullet points above.

Under the reporting requirements, these third party settlement organizations must report the gross reportable transactions of the participating payee to which they make payments provided the payee has gross reportable transactions of more than $600, regardless of the number of transactions.

A. A payment settlement entity is an entity that makes payment in settlement of a payment card transaction or third party network transaction. PSE’s may be domestic or foreign entities and they can take one of two forms:

• Merchant Acquiring Entity: A bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions.
• Third Party Settlement Organization: The central organization that has the contractual obligation to make payment to participating payees of third party network transactions.

A. No. An automated clearing house processes electronic payments between buyers and sellers through wire transfers, electronic checks, and direct deposits. Further, there is no contractual relationship between the automated- clearing house and payees. Thus, an automated clearing house does not qualify as a third party settlement organization and payments made through its network are not reportable under IRC 6050W.

A. Often called an acquiring or merchant bank, a merchant acquiring entity is the bank or other organization that has the contractual obligation to make payment to participating payees in settlement of payment card transactions. Merchant acquiring entities are responsible for reporting reportable payment card transactions.

A. A participating payee is:

• any person who accepts a payment card as payment, or
• any person who accepts payment made by a third party settlement organization in settlement of a third party network transaction.

A. The “gross amount” means the total dollar amount of total reportable payment transactions for each participating payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts. The dollar amount of each transaction is determined on the date of the transaction.

A. Health carriers operating a healthcare network do not fit the definition of a third party settlement organization because they do not operate a third party payment network that enables purchasers to transfer funds to providers of goods and services. Rather, health carriers accept payment, in the form of premiums, from buyers (employers or persons covered under the carrier’s plan) to give those buyers access to a network of healthcare providers; separately, health carriers then pay compensation to the medical professionals within their networks pursuant to predetermined rates. Accordingly, healthcare networks are not third party settlement organizations.

A. No. In-house accounts payable departments do not fit the definition of a third party settlement organization because they are internal processors of payments. They are not a third party.