What is a 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) in a third party payment network.
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.
The most common example of a third party settlement organization is an online auction-payment facilitator, which operates as only an intermediary between buyer and seller by transferring funds between accounts in settlement of an auction/purchase.
Third party settlement organizations charge sellers a fee for facilitating the transaction. Under the reporting requirements, these entities must report the gross reportable transactions of the businesses to which they make payments provided the payee satisfies certain transaction volume and dollar thresholds.
Do healthcare networks fit within the definition of a third party settlement organization?
Health insurance carriers that operate a healthcare network do not fit within the definition of a third party settlement organization because they do not transfer funds from buyers to sellers.
Do accounts payable departments fit the definition of a third party settlement organization?
No. An in-house accounts-payable department is not a third party settlement organization because it is not a "third-party." It is an internal processor of payments.
Who is responsible for reporting third party network transactions?
The third party settlement organization or its electronic payment facilitator is responsible for reporting the gross reportable transaction amounts paid to participating payees in their network.
Does an automated clearing house (ACH) qualify as a third party settlement organization?
No. An automated clearing house merely processes electronic payments between buyers and sellers through wire transfer, electronic checks, and direct deposit.
Does a third party settlement organization have to report Merchant Category Codes (MCC)?
No. Third party settlement organizations do not use MCC codes to classify payees. Therefore, they would generally not complete Box 2 on the Form 1099-K.