New Payment Card Reporting Requirements – FAQ
What is section 6050W of the Internal Revenue Code?
Section 6050W was added by section 3091 of the Housing Assistance Tax Act of 2008 and requires information returns to be made by certain payors with respect to payments made in settlement of payment card (merchant card) transactions and third party payment network transactions.
MERCHANT CARD TRANSACTIONS FAQs
What are payment settlement entities?
In merchant payment card transactions, a payment settlement entity is a domestic or foreign entity that is a merchant acquiring entity.
What is a merchant acquiring entity?
Often called an “acquiring” or “merchant” bank, a merchant acquiring entity is the bank or other organization that has the contractual obligation to pay the participating merchant/payee in settlement of payment card transactions. Under Treasury regulations section 1.6050W-1, a merchant acquiring entity makes payment in settlement of a payment card transaction if it submits the instruction to transfer funds to the account of the payee.
Who is responsible for reporting merchant card payments?
The entity that submits the instruction to transfer funds to the participating payee is responsible for reporting the gross amount of reportable transactions.
A merchant acquiring entity might outsource the processing of the transactions to a processor, which may share the contractual obligation to pay the merchant. When both a merchant acquiring entity and a processor have contractual obligations with the merchant to pay, the entity that submits the instructions to transfer funds to the account of the participating merchant is responsible for preparing and submitting Forms 1099-K to the payee and the IRS.
Who reports merchant card payments when a payment settlement entity contracts with a third-party, such as an electronic payment facilitator, to settle reportable transactions?
Whenever a payment settlement entity contracts with a third party, such as an electronic payment facilitator, to submit instructions to transfer funds to the account of the participating merchant in settlement of reportable payment transactions, reporting is required by the third party. The third-party need not have any agreement or arrangement with the participating merchant and the payment need not come from the third-party’s account in order to trigger reporting. Two examples of entities that could be an electronic payment facilitator are:
- A processor who processes transactions for a merchant acquiring bank and submits instructions to transfer funds to payee’s account but does not have a contractual obligation to pay the merchant.
- A sponsoring bank that submits the instructions to transfer funds to an ACH network on the processor’s or merchant acquiring bank’s behalf.
What is a Merchant Category Code (MCC)?
A Merchant Category Code (MCC) is a four-digit number used by the card payments industry to classify payees. The IRS reporting requirement specifies the reporting of MCC’s according to bankcard industry standard definitions. There are approximately 600 MCCs representing different types of businesses (e.g. 4411 – Cruise Lines, 5462 – Bakeries, 5532 – Automotive Tire Stores). If a reporting entity or its processor employs an industry classification system other than or in addition to MCCs, the reporting entity should assign to each payee an MCC which most closely corresponds to the description of the payee’s business.
What should be reported if a merchant has receipts classified under more than one MCC?
For 2011, if a merchant has receipts classified under more than one MCC, the reporting entity may either:
- File separate Forms 1099-K reporting the gross receipts attributable to each MCC, or
- File a single Form 1099-K reporting total gross receipts and the MCC which corresponds to the largest portion of total gross receipts.
THIRD-PARTY NETWORK TRANSACTIONS FAQs
What is a third-party settlement organization?
A third-party settlement organization is a central organization that has the contractual obligation to make payments to participating payees (generally, a merchant) in a third party payment network. Characteristics of a third party payment network include: (i) the existence of a central organization with whom providers of goods and services have established accounts, (ii) an agreement between the central organization and providers to settle transactions between the providers of goods and services and purchasers, (iii) the establishment of standards and mechanisms for settling such transactions and (iv) 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 merely as 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.
Who is responsible for reporting third party network transactions?
The third-party settlement organization or an electronic payment facilitator is responsible for reporting the gross amounts of reportable transactions paid to participating payees in their network.
Does an automated-clearing house 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. 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 on its network are not reportable.
Does a third party settlement organization have to report MCC Codes?
No. Third-party settlement organizations do not use MCC codes to classify payees. Box 2 on the Form 1099-K should not be completed by third-party settlement organizations.
What is a payee?
A payee (or “participating payee”) is any person that accepts a payment card as payment, or in the case of a third party network transaction, any person that accepts payment made by a third party settlement organization on behalf of the purchaser or customer.
Why is this reporting necessary?
The reporting is required by law. Third-party information reporting has been shown to increase voluntary tax compliance, improve collections and assessments within IRS, and thereby reduce the tax gap.
How are reportable transactions to be reported?
The entity responsible for reporting merchant card and third-party transactions will report gross transaction amounts on the new Form 1099-K, Merchant Card and Third-Party Payments.
What information must be reported?
The gross amount of reportable transactions of a payee for the calendar year and its corresponding months are required to be reported. The reporting of both annual and monthly amounts is necessary in order to reconcile differences between information returns and tax returns of fiscal year filers. The name, address, and taxpayer identification number of each participating payee must also be included on the form.
When are Forms 1099-K due?
Information reporting for payment card and third party network transactions are due to the IRS by Feb. 28 (March 31, if filed electronically), of the year following the transactions. The first Forms1099-K will be due for calendar year 2011, and must be submitted to the IRS by Feb. 28, 2012 (March 31, 2012 if filed electronically). Since March 31 falls on a Saturday, the due date for filing electronically is April 2, 2012).
Can Forms 1099-K be filed electronically?
Yes, there will be protocol for the electronic submission of Form 1099K. In fact, if a payment settlement entity must submit more than 250 individual information returns in any calendar year, all must be submitted electronically. Information about electronic filing of Form 1099-K can be found on the IRS website at www.irs.gov.
What are payee statements and when are they due?
Payment settlement entities must furnish a “payee statement” showing the information reported to the IRS on Form 1099-K to each participating payee. The statements must be provided by the reporting entity to the payee by January 31 of the year following the calendar year for which the return was made. The first payee statements must be furnished by Jan. 31, 2012.
Can payee statements be furnished electronically?
Yes, payee statements may be provided electronically. Consent for receipt of electronic statements must first be provided by the payee. Consent can be granted electronically. See Treasury regulations section 1.6050W-2 for instructions for receiving consent from payees. If a payee statement is submitted electronically, an email address for the reporting entity may be provided in lieu of a phone number.
What is the de minimis standard for reporting?
The de minimis standard exempts the reporting of transactions settled by a third-party settlement organization of a payee in a third-party payment network if the aggregate payments to the payee do not exceed $ 20,000 or if the aggregate number of transactions does not exceed 200 within the calendar year. This applies only to the payments settled by third-party settlement organizations.
Does the de minimis standard apply to payment card transactions?
No, the de minimis standard does not apply to payment card transactions; the de minimis standard applies only to the payment settled by third-party settlement organizations.
What constitutes the “gross amount” of reportable transactions?
The “gross amount” of reportable transactions means the total dollar amount of aggregate transactions without regard to any credits, charge-backs, fees, cash equivalents, discounts, refunds or any other amounts.
Does the “gross amount” include fees, charge-back or other costs and refunded amounts?
No, the “gross amount” is strictly the total dollar value paid to the participating payees before any fees, refunds or any other amounts are considered.
Are foreign payment settlement entities subject to the reporting requirements?
Yes, the statute and regulations establish that a “payment settlement entity” may be a domestic or foreign entity.
Are payment settlement entities required to report the transactions of governmental units, whether state or federal?
Yes, the term “participating payees” includes any governmental unit as well as any agency or instrumentality thereof.
What qualifies as a “payment card”?
Under the regulations, a payment card is a card, issued to a cardholder that a network of unrelated persons has agreed to accept as payment under an agreement that provides standards and mechanisms for settling the transactions between a merchant acquiring bank or similar entity and the providers who accept the cards as payment. “Unrelated” means any person who is not related within the meaning of section 267(b) of the Internal Revenue Code, including the application of section 267(b) and (e)(3), or section 707(b)(1).
The term “payment card” includes credit cards, debit cards, and stored-value cards, as well as payment through any indicia of a payment card (such as a credit card number).
Are purchases made with stored-value cards or gift cards reportable transactions?
It depends. Purchases made with store cards or gift cards are not reportable when the card is accepted as payment by someone who is related to the issuer of the card (such as a subsidiary company or the company itself). Under these circumstances, the stored-value cards do not fit the definition of a “payment card” and purchases made with such cards are therefore not reportable. However, purchases made with a stored-value card accepted by a network of persons unrelated to the issuer and each other are reportable transactions. “Unrelated” means any person who is not related within the meaning of section 267(b) of the Internal Revenue Code, including the application of section 267(b) and (e)(3), or section 707(b)(1).
Do healthcare networks fit within the definition of a third-party settlement organization? What about accounts payable departments?
Health carriers operating 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. Rather, health carriers accept payment, in the form of premiums, from buyers (employers or persons covered under the carrier’s plan) in order 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 do not qualify as third-party settlement organizations.
Likewise, an inhouse accounts-payable department is not a third-party settlement organization. An in-house accounts-payable department is not a third-party settlement organization quite simply because it is not a “third-party.” It is merely an internal processor of payments by the umbrella organization to outside parties.
If transactions are already reported under other sections of the Internal Revenue Code, must they be reported again by payment settlement entities?
Section 6050W explicitly grants the Secretary the power to draft regulations to prevent duplicate reporting of the same transaction. The final regulations under section 6050W (the new payment card reporting requirements) provide that payment card and third-party network transactions that otherwise would be reportable both under section 6041 or 6041A(a) and under section 6050W must be reported under section 6050W and not under section 6041 or 6041A(a). Relief has not been granted for reporting under any other Internal Revenue Code section.
How can payee TINs be verified? How soon?
Verification of payee TINs is done through the “Taxpayer Identification Number (TIN) Matching Program.” See Revenue Procedure 2003-9, 2003-1 C.B. 516 for additional information. Verification of payee TINs in the IRS’ database is permitted as of the date of the legislation’s enactment (July 30, 2008).
Can the entity responsible for filing Form 1099-K contract with a third-party to prepare and file these returns?
Yes. However, the entity responsible for filing (i.e., the entity that submits the instructions to transfer funds) is liable for any applicable penalties under sections 6721 and 6722 if the reporting requirements are not met. In addition, the name, address, and Taxpayer Identification Number of the entity responsible for filing must be reported on the Form 1099-K in the box for Filer’s.