Essential for US Sales Tax Filing: Form 1099-K Key Updates

What is Form 1099-K?

Form 1099-K (Payment Card and Third-Party Network Transactions) is a tax form that tracks income from third-party payments.

Primary sources of third-party income include:

1. Credit cards, debit cards, or stored-value cards such as gift cards (Payment Cards)
2. Payment applications or online marketplaces for goods or services (Third-Party Settlement Organisations (TSPOs))

If you sell goods or provide services and receive a total amount exceeding the reporting threshold through payment applications or online marketplaces, or accept payments from payment cards, you will receive a Form 1099-K.

Form 1099-K is only used for recording purposes; tax obligations are only triggered when the total income reaches the appropriate threshold.

Form 1099-K FAQ Update

On the 6th February 2024, the Internal Revenue Service (IRS) made revisions to their FAQ for Form 1099-K.

This replaces the FAQ previously published on the 22nd March 2023.

The update primarily covers the following topics: 

1. General Information

Q1: Is there a threshold amount that must be met before I receive Form 1099-K? (Updated February 6, 2024)

For payment cards: There is no threshold amount that must be met to receive Form 1099-K for payments received through payment card transactions. Therefore, even if you receive a payment of just $0.01 through a payment card transaction, you should receive a Form 1099-K.

For TPSOs: The federal reporting threshold remains the same as in previous years, which is total payments received for goods or services exceeding $20,000 and more than 200 transactions per payee. The TPSO reporting threshold in your state may be lower, which means you could still receive a Form 1099-K, even if the total payments received this year did not exceeding the federal reporting threshold. 

Background Information:

1. • The American Rescue Plan Act lowered the reporting threshold from a recipient payment total exceeding $20,000 and 200 transactions, to a recipient payment total exceeding $600 (regardless of the number of transactions)
2. • 2022: The IRS issued Notice 2023-10, temporarily delaying the implementation of the lowered reporting requirements for TPSOs. However, despite Notice 2023-10, you may have already received a Form 1099-K with the lower threshold
3. • 2023: The IRS identified 2023 as another transitional year for the new reporting requirements for TPSOs in Notice 2023-74. However, despite Notice 2023-74, you may have already received a Form 1099-K with a lower threshold

Q2: What is a payment card? (Updated February 6, 2024)

The term ‘payment card’ includes credit cards, debit cards, stored-value cards (including gift cards), and any unique identifier on a payment card (such as a credit card number) used for payment.

Payment cards are issued pursuant to agreements that provide for all of the following:

• • One or more issuing authorities;
  • An unrelated person network and participating payees that agree to accept payment cards; and;
  • Standards and mechanisms for settling transactions between participating payees acquiring tangible goods or services and persons agreeing to accept payment cards.

Q3: What is a Third-Party Settlement Organisation (TPSO)? (Updated February 6, 2024)

A TPSO is a central organisation that has contractual obligations to make payments to participating payees (typically merchants or businesses) from third-party network transactions. For example, some applications used for transferring funds between buyers and sellers.

Q4: Does the deferred $600 reporting threshold mean I won’t receive a Form 1099-K for any totals of $20,000 or less? (Updated February 6, 2024)

Not necessarily.

While the federal reporting threshold for TPSOs in 2023 is $20,000 and 200 transactions, companies may still send Form 1099-Ks for payments for goods or services that are lower than this amount.

Q5: When a payment settlement entity contracts with a third party such as an electronic payment service provider to settle reportable payment transactions, who reports payment card transactions? (Updated February 6, 2024)

The entity responsible for submitting transfer instructions to the participating payee’s account is responsible for reporting payment card transactions.

In this case, the electronic payment facilitator is responsible for reporting as it is the entity submitting the transfer instructions for settlement of payment card transactions.

Q6: If not reported on Form 1099-K, do I still need to report payments on my tax return? (Added February 6, 2024)

Yes, the reporting threshold for Form 1099-K does not affect whether payments should be taxed or whether they must be reported on a tax return. Form 1099-K is only used to record electronic income.

All income is assumed to be taxable if over the threshold (unless exempt).

2. What should you do if you receive a Form 1099-K?

Q1: What should I do if I receive a 1099-K form? (Added February 6, 2024)

When filing your tax return, you can use Form 1099-K along with any other tax returns. Form 1099-K may include a combination of different types of total payments received.

The type of payments received determines the reporting position of these payments on the tax return, and whether you have a tax obligation.

Q2: Can I provide an ITIN instead of an SSN or EIN when selling goods online? What should I do if the file number for the payment application or online marketplace is incorrect? (Added February 6, 2024)

Yes, you can provide an ITIN. If the file number for the payment application or online marketplace is incorrect, contact the filer for correction so that you do not receive backup withholding.

Q3: What should I do if I receive multiple different 1099-K forms? (Added February 6, 2024)

You should use all of the available forms and any other available records to determine your actual tax obligation.

3. Common Scenarios

Q: Will I receive Form 1099-K if I have a seasonal craft business and accept payments through third-party payment applications or online marketplaces? (Updated February 6, 2024)

If you accept payments using a third-party payment application or an online marketplace, you may receive a Form 1099-K from the application or marketplace that you used to sell your goods/services.

4. Third-party submission of Form 1099-K

Q1: What is a recipient report, and when should it be provided to the recipient (taxpayer)? (Updated February 6, 2024)

Entities required to file information returns such as Form 1099-K for payment card and third-party network transactions must also provide the same information reported to the IRS to the recipient (taxpayer).

The recipient report must be provided to the taxpayer by 31^st January of the year following the transactions.

Q2: Who is responsible for reporting third-party network transactions? (Updated February 6, 2024)

Third-Party Settlement Organisations (TPSOs) such as popular payment applications or online marketplaces that responsible for transferring funds to participating transaction recipients (taxpayers) are responsible for reporting the total reportable amount of third-party network transactions.

Q3: Line 2 on Form 1099-K refers to the Merchant Category Code (MCC). What is an MCC? (Updated February 6, 2024)

The MCC is a four-digit number used by the payment card industry to classify businesses based on the goods or services they provide.

There are approximately 600 MCCs, representing different types of businesses (e.g. 4411 for cruise lines, 5462 for bakeries, and 5532 for automotive tyre stores)

Q4: Are foreign payment settlement entities subject to reporting requirements? (Updated February 6, 2024)

Payment settlement entities can be either domestic or foreign entities.

5. What should I do as a cross-border business?

Form 1099-K can be used for reporting the sale of goods/services through online marketplaces.

You can use the information on Form 1099-K, along with your other tax records to check your tax position, helping you to avoid situations where a failure to pay taxes on time may affect your business operations.

When you receive a Form 1099-K, you should check the following:

(1) Whether the 1099-K form belongs to you, or is a duplicate

(2) Reporter/recipient information and Taxpayer Identification Number (TIN)

(3) Total amount of payment card/third-party network transactions

(4) Number of payment transactions

(5) Whether the Merchant Category Code (MCC) accurately describes your business

Form 1099-K only applies to commercial activities such as the sale of goods and services, and does not apply to personal transactions.  It also does not change basic tax obligations (such as income derived from the sale of goods or services, which should already be taxed).

U.S. taxation is complex, and many policies are subject to change. It is recommended that businesses keep bank statements, receipts, invoices, etc. to deal with any periodic audits by the IRS and mitigate potential tax risks.

Not sure where or how to start? TBA Global can help to ensure that your business remains compliant with US taxation requirements. You can get in touch with us via email info@tbaglobal.com or WhatsApp for a free one-to-one consultation.