If you are an eCommerce business, you must read this article to know:
- What is Form 1099-K and Why is it Important for an eCommerce Business?
- Who Is Required to File Form 1099-K?
- What Are The Form 1099-K Requirements 2022?
Merchants selling products and services online undertake payment transactions through a number of methods. Few of these include payments made through credit cards, digital payments via third-party networks, and other freelance platforms managing payments between the two parties.
Note that the third-party payment networks include companies like Amazon, Venmo, PayPal, Square, etc. These third-party payment networks are also called Payment Settlement Entities (PSEs).
Beginning 2022, the American Rescue Plan Act of 2021 (the Act) modified section 6050W under the Internal Revenue Code (IRC). As per the modification, the IRS mandated that merchants and third-party settlement organizations must report the proceeds of payment card and third-party network transactions made to the merchant on Form 1099-K.
The PSEs are required to provide this form to the merchants only if the merchants have either accepted payment cards for payments or received payments through a third-party network in the calendar year.
In this article, we are going to discuss what are the new Form 1099-K requirements 2022 that both the merchants and PSEs must know. But before that let’s have an understanding of what is Form 1099-K and who should fill this form.
What is Form 1099-K?
Form 1099-K is an IRS information return that reports the “Payment Card and Third-Party Network Transactions”. The reporting of such payment transactions is mandated to improve voluntary tax compliance.
The third-party PSEs must provide this form to the merchant who receives payments from either payment card transactions or third-party payment networks. Further, such payments must be above the minimum reporting threshold.
The minimum gross payment transaction threshold for a merchant to receive Form 1099-K from PSEs for FY 2022 is $600. This means a merchant will receive Form 1099-K from third-party PSEs for tax reporting if he or she undertakes payment transactions of an amount exceeding $600 via payment cards or third-party settlement networks.
Further, there is no limit on the number of transactions for which such a return needs to be filed by the taxpayers for FY 2022.
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Prior to 2022, the minimum gross payment transaction threshold for a merchant to receive Form 1099-K from PSEs for FY 2022 is $20,000. In addition to this, the number of transactions for which the taxpayers had to file such a return prior to FY 2022 was 200.
The new rule is effective beginning with payment transactions settled after December 31, 2021.
Who Must File Form 1099-K?
As per Form 1099-K Requirements 2022, a Payment Settlement Entity (PSE) needs to file Form 1099-K with the IRS. Such a form is filed for payments made in the settlement of reportable payment transactions for each calendar year.
It is important to note that a PSE makes a payment in settlement of any payment card or third-party network transaction if it submits the instruction. The instruction relates to the transfer of funds to the account of the participating payee to settle the reportable payment transaction.
Who is a Payment Settlement Entity (PSE)?
PSE is an entity having a contractual obligation to pay merchants receiving payments online via payment cards or third-party settlement organizations in the settlement of such transactions.
The merchants receiving payments online via payment cards or third-party settlement organizations are also called participating payees. They are contractually obligated to make payment to the participating payees in the settlement of payment card transactions.
A PSE can either be a domestic or foreign bank or other organization having the contractual obligation to make payment to participating payees in the settlement of payment card transactions. Such an entity can also be a third-party settlement organization (TPSO) having the contractual obligation to make payments to participating payees of third-party network transactions.
Who is a Payee?
A participating payee is a person or an entity that accepts a payment card as a payment or accepts payment from a TPSO in the settlement of a third-party network transaction.
A payment card is any debit, credit, or stored-value card having prepaid value including a gift card. Such a card is issued as per an agreement that provides for all of the following:
- One or more issuers of the cards.
- A network of persons unrelated to each other, and to the issuer, who agrees to accept the cards as payment.
- Standards and mechanisms for settling the transactions between the merchant acquiring entities and the persons who agree to accept the cards as payment.
Likewise, a third-party payment network is an agreement that provides for all of the following:
- A huge number of goods or service providers establishing an account with an unrelated central organization must have agreed to settle transactions according to the terms of the agreement.
- Standards and mechanisms for settling the transactions.
- Guarantee of payment to the persons providing goods or services (participating payees) in settlement of transactions with purchasers as per the agreement.
Note that a third-party payment network does not include any agreement to provide for the issuance of payment cards.
When Is A Taxpayer Not Required To File Form 1099-K?
As per Form 1099-K Requirements 2022
- PSE that is a U.S. payer or U.S. middleman is not required to file Form 1099-K for payments to a participating payee with a foreign address. This will apply only if the PSE prior to payment has documentation that proves that the payment is made to a foreign person or an offshore account. However, a PSE must file Form 1099-K for payments made outside the United States to an offshore account if:
- A U.S. residential or correspondence address is associated with the participating payee
- The PSE has standing instructions to direct the payment to a bank account maintained in the United States.
- Or the PSE knows or has reason to know that the participating payee is a U.S. person.
- PSE that is not a U.S. payer or U.S. middleman is not required to file a Form 1099-K for payment to a participating payee that does not have a U.S. address. This rule is applicable only if the PSE does not know or have reason to know that the participating payee is a U.S. person. In case the participating payee has any U.S. address, the PSE may treat such a participating payee as a foreign person. Provided the PSE has documentation prior to payment that proves that the payment is made to a foreign person.
- PSE that is a non-U.S. payer and has reason to know that a participating payee is a U.S. person is not required to file Form 1099-K. Provided if the PSE obtains from the payee a Form W-8 or documentary evidence as per the guidelines specified.
- A PSE may accept a substitute form in place of Form W-8BEN to certify the non-U.S. status of a participating payee.
Due Date To File Form 1099-K For 2022
The due date to file Form 1099-K, Payment Card and Third Party Network Transactions, to the IRS for FY 2022 is February 28, 2023. In case the taxpayer files the form electronically on the IRS portal, then the due date to file Form 1099-K in such a case is March 31, 2023.
Further, the due date to provide Form 1099-K, Payment Card, and Third Party Network Transactions, to the recipient or participating payee is January 31, 2023, unless otherwise specified.
Note that if any date mentioned above falls on a Saturday, Sunday, or legal holiday in the District of Columbia or where the return is to be filed, the due date is the next business day.
Also, the Form 1099-K will be considered as filed within the specified deadline only if the following conditions are met:
- The Form is properly addressed, postmarked, and mailed using the official mail of the United States, or a private delivery service (PDS) designated by the IRS on or before the due date.
- The Return is filed by the next business day in case the regular due date falls on a Saturday, Sunday, or legal holiday in the District of Columbia or where the return is to be filed. Note that a business day is any day that is not a Saturday, Sunday, or legal holiday in the District of Columbia or where the return is to be filed.
Extension of Due Date To File Form 1099-K for 2022
Many taxpayers ask this question “Can I File Taxes After The Deadline? In case a taxpayer needs an extension of time to file returns, he can file Form 8809 and get an automatic extension of 30 days. The taxpayer must submit such a form physically or through the FIRE System either as a fill-in form or an electronic file.
In addition to this, the taxpayer asking for an extension is required to put a signature or explanation for the extension.
To get the 30-day extension for filing returns, it is necessary that the taxpayer files Form 8809 within the due date.
There can be a scenario wherein a taxpayer is unable to file tax returns even within the additional 30-day extension period of filing the tax returns. In such a hardship condition, the taxpayer can ask for a 30-day extension in addition to the initial 30-day extension.
How to Apply For an Extension of Due Date To File Form 1099-K for 2022?
All the taxpayer needs to do is to file Form 8809 the moment he gets to know that a 30-day extension of time to file the return is required.
To apply Form 8809 for the extension, the taxpayer needs to follow the instructions given on the form. Then, he needs to mail it to the address listed below.
|If an entity’s principal business, office, or agency, or an individual’s legal residence is located in the following areas within the United States:||Such entity or individual needs to use the following address:|
|Alabama, Arizona, Arkansas, Delaware, Florida, Georgia, Kentucky, Maine, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Texas, Vermont, Virginia||Internal Revenue ServiceAustin Submission Processing CenterP.O. Box 149213Austin, TX 78714|
|Alaska, Colorado, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Washington, Wisconsin, Wyoming||Department of the TreasuryIRS Submission Processing CenterP.O. Box 219256Kansas City, MO 64121-9256|
|California, Connecticut, District of Columbia, Louisiana, Maryland, Pennsylvania, Rhode Island, West Virginia||Department of the TreasuryIRS Submission Processing Center1973 North Rulon White Blvd.Ogden, UT 84201|
|If an individual’s legal residence or an entity’s principal place of business, or principal office or agency, is outside the United States:||Such entity or individual needs to use the following address:|
Internal Revenue ServiceAustin Submission Processing CenterP.O. Box 149213Austin, TX 78714
In addition to the above, a taxpayer or a business entity seeking an extension must contact the applicable state and local tax department as necessary for reporting requirements and where to file.
See the instructions for Form 8809 for more information.
You can submit the extension request online through the FIRE System. You are encouraged to submit requests using the online fillable form. See Pub. 1220, Part B, for more information on filing online or electronically.
How To File Form 1099-K With the IRS in 2022?
I. How To File Form 1099-K On Paper?
To file Form 1099-K physically with the IRS, a taxpayer must ensure that it files error-free returns to the IRS. This is because the IRS reviews the returns thoroughly before filing to prevent mailing erroneous notices to payees or others for whom information is being reported.
Also, a taxpayer must ensure that he is not reporting payments to the IRS that are smaller than the minimum amount described in the form. In case the taxpayer wants to prevent the hassle and cost of filing separate paper returns with the IRS, he can file Copies A for all the payments.
What is Copy A of Form 1099-K?
Copy A of a form refers to a summary document that a taxpayer must file along with Form 1096 when filing paper returns with the IRS.
The IRS allows taxpayers to group the forms to be filed under a particular form number in order to save the cost of filing separate returns and for convenience. Each group of forms must have a separate Form 1096 along with Copy A.
Say a taxpayer needs to file Forms 1098, 1099-A, and 1099-MISC with the IRS. To do so, he must complete one Form 1096 to file Forms 1098, another for Forms 1099-A, and the third one for Forms 1099-MISC.
It is important to note that a taxpayer cannot file the printouts of Form 1096 or Copy A of Forms 1098, 1099, 3921, or 5498 taken from the IRS website. This is because the IRS processes paper forms by the optical character recognition machine. However, there are other forms that a taxpayer can fill in and print from the IRS website.
Also, a transmitter, service bureau, paying agent, or disbursing agent can sign Form 1096 on behalf of any person required to file Form 1099-K. Provided, the following two conditions are met:
- The agent has the authority to sign the form under an agency agreement whether oral, written, or implied and that is valid under state law.
- The agent signs the form and adds the caption “For: (Name of the payer).”
- The signing of the form by an authorized agent on behalf of the payer does not relieve the payer of the liability for penalties for not filing a correct, complete, and timely Form 1096 and accompanying returns.
In addition to the above, a service bureau or agent may issue acceptable substitute statements to the recipients. Such statements must showcase the same payer’s name as the one mentioned on the information returns filed with the IRS.
Also, the taxpayer must keep copies of information returns it files with the IRS or have the ability to reconstruct the data. Such data needs to be reconstructed for at least 3 years from the due date of Form 1099-K. In case backup withholding is imposed, the taxpayer must keep copies of information returns for 4 years.
Finally, the taxpayer must ship and mail the forms to the IRS in a flat mailer. In case the taxpayer is sending many forms, he may send them in conveniently sized packages. On each package, the taxpayer must write his name, number the packages consecutively, and place Form 1096 in package number 1. Postal regulations require forms and packages to be sent by First-Class Mail.
What is Copy B of Form 1099-K?
Copy B of Form 1099-K is a payee statement that a taxpayer needs to file with the payees or the recipients. Generally, the payee statement is a copy of an information return that is designated “Copy B” on Form 1099-K.
A “payee” is any person who is required to receive a copy of the information mentioned on Form 1099-K by the filer of the return.
II. How To File Form 1099-K Electronically?
A taxpayer who is required to file 250 or more information returns during the year must file such returns electronically. The 250-or-more requirement applies separately to each type of form including Form 1099-K.
For instance, if a taxpayer needs to file 500 Forms 1099-K and 100 Forms 1099-A, then he must file Forms 1099-K electronically. However, he is not required to file Forms 1099-A electronically.
To file Form 1099-K electronically, the new taxpayers need to file Form 4419 by November 1 of FY 2022 before their information return is due. This is to ensure that they are ready to file the tax return electronically.
Note that the IRS may not process Forms 4419 received after November 1 as it needs 45 days for processing. Thus, the taxpayers may not be able to meet their electronic filing needs in such a case. Once the taxpayers receive the approval to file the returns electronically, they need not reapply each year.
Also, the electronic filing requirement does not apply if a taxpayer applies for and receives a hardship waiver.
Those taxpayers who want to receive a waiver from the required filing of information returns electronically must submit Form 8508 with the IRS. They must submit such a form at least 45 days before the due date of the returns for which they are requesting a waiver.
Note that the taxpayers cannot apply for a waiver for more than 1 tax year at a time. In case taxpayers need a waiver for more than 1 tax year, they must reapply at the appropriate time each year.
Also, any corrections that the taxpayers make for the same types of returns will get covered under the waiver if the IRS approves a waiver for original returns. However, there can be a scenario wherein the taxpayers submit the original returns electronically but want to submit corrections on paper. In such a case, the taxpayers must get a waiver approved for the corrections, provided they are filing 250 or more corrections.
Also, there is no need for the taxpayers to send a copy of the approved waiver received to the RS Submission Processing Center where they file their paper returns. The taxpayers must keep the waiver with themselves for their records only.
For the FY 2022, the taxpayers can file Form 1099-K electronically through the Filing Information Returns Electronically System (FIRE System) using a Transmitter Control Code (TCC). The Internal Revenue Service (IRS) encourages tax return filers who have less than 250 information returns to file electronically as well.
A new online Information Returns (IR) Application for Transmitter Control Code (TCC) is available on the Filing Information Returns Electronically (FIRE) webpage located at https://www.irs.gov/e-file-providers/filing-informationreturns-electronically-fire.
This new application replaces both Form 4419, Application For Filing Information Returns Electronically, and Fill-in Form 4419 on the FIRE System.
Penalty On Failure To File Form 1099-K
I. Penalty For Late Filing Of Form 1099-K
The taxpayers must file Form 1099-K electronically if they have received the approval for the same from the IRS. In case they fail to file returns electronically within the due date and do not have an approved waiver, such taxpayers are subject to a penalty for failure to file electronically. This is unless such taxpayers establish reasonable cause for not filing the returns electronically.
It is important to note that a taxpayer can file up to 249 returns on paper and such returns are not subject to a penalty for failure to file electronically.
The maximum penalty that the IRS can charge for Form 1099-K and the other mentioned forms is $290 per return. Also, the penalty applies separately to original returns and corrected returns.
|Reason of Not Filing||Penalty Amount||Maximum Penalty|
|The taxpayer is required to pay a penalty if he fails to file a correct information return by the due date and is unable to showcase a reasonable cause for not filing the returns. Note that the penalty applies if the taxpayer:|
– Fails to file timely
– Fails to include all information required to be showcased on a return
– Includes incorrect information on a return.
– Files on paper when he was required to file the return electronically
– Reports an incorrect TIN
– Fails to report a TIN
– Fails to file paper forms that are machine-readable and applicable revenue procedures provide for a machine-readable paper form.
|$50 per information return if the taxpayer correctly files within 30 days||$588,500 per year ($206,000 for small businesses)|
|$110 per information return if the taxpayer correctly files more than 30 days after the due date but by August 1||$1,766,000 per year ($588,500 for small businesses)|
|$290 per information return if the taxpayer files after August 1 or he does not file required information returns||$3,532,500 per year ($1,177,500 for small businesses)|
Exceptions to Penalty For Late Filing Of Form 1099-K
The penalty on failure to file Form 1099-K will not apply if the taxpayer:
- Proves that the failure-to-file was due to reasonable cause and not due to willful neglect. Such a cause was beyond the taxpayer’s control or due to significant mitigating factors. Though, the taxpayer acted in a responsible manner and took steps to avoid the failure to file the return.
- Makes an inconsequential error or omission as it is not considered as a failure to include correct information. Such an error or omission will not stop IRS from processing the return. Further, it will not prevent IRS from correlating the information required to be shown on the return with the information shown on the payee’s tax return. Also, an inconsequential error or omission will not prevent IRS from putting the return to its intended use otherwise. It is important to note that errors and omissions that are not inconsequential in nature are the ones related to:
- a TIN,
- a payee’s surname, and
- any money amount with respect to the safe harbor for de minimis dollar amount errors, except the one mentioned in the next point.
- Is eligible for the de minimis rule for corrections. In this case, the penalty for failure to file correct information returns will not apply to a certain number of returns, even though the taxpayer cannot show reasonable cause if such a taxpayer:
- Files such information returns timely,
- Either fails to include all the information required on a return or includes incorrect information, and
- Files corrections by August 1.
If a taxpayer meets all the above conditions, the penalty for filing incorrect returns will not apply to the greater of: (i) 10 information returns or (ii) ½ of 1% (0.005) of the total number of information returns the taxpayer is required to file for the calendar year.
- Is eligible for the safe harbor for de minimis dollar amount errors. The safe harbor provides that no penalty is imposed and no correction of the error is required. Provided an error on an information return or payee statement relates to an incorrect dollar amount that differs from the correct amount by $100 or less (or $25 if the error relates to the amount of tax withheld). Note that safe harbor does not apply for an (i) failure to timely file an information return or furnish a payee statement, (ii) failure to include all information required or the inclusion of incorrect information.
Also, if the taxpayer fails to file a correct information return intentionally, he or she will have to pay a penalty of at least $580 per information return with no maximum penalty.
II. Penalty for Failure To Furnish Correct Payee Statements
A taxpayer is subject to a penalty in case he or she fails to provide correct payee statements and showcase reasonable cause for not providing such statements to the payees.
Note that the taxpayer needs to pay the penalty if he fails to:
- Provide the statement by the due date. For most of the returns, the due date is January 31, 2022
- Include all information required to be showcased on the statement, or
- Include incorrect information on the statement.
Further, the amount of the penalty is based on when the taxpayer furnishes the correct payee statement. Note that Penalty for Failure To Furnish Correct Payee Statements is a separate penalty. It is applied in the same manner as the penalty for failure to file correct information returns by the due date.
Exceptions to Penalty For Failure To Furnish Correct Payee Statements
A taxpayer is not required to pay a penalty if he or she makes an inconsequential error or omission.
This is because such an error or omission is not considered a failure to include correct information. As a result, it cannot prevent the payee from timely receiving correct information and reporting it on his or her income tax return. Further, such an error or omission cannot stop the payee from putting the statement to its intended use otherwise.
Note that the errors and omissions that are not inconsequential in nature are those relating to:
- A dollar amount with respect to the safe harbor for de minimis dollar amount errors, except the one mentioned below
- A significant item in a payee’s address
- The appropriate form for the information provided, that is, whether the form is an acceptable substitute for the official IRS form, and
- Whether the statement was furnished in person or by “statement mailing,” when required
Also, if the taxpayer fails to provide a correct payee statement intentionally, he or she will have to pay a penalty of at least $580 per payee statement with no maximum penalty.
Recipient Taxpayer Identification Numbers (TINs) and Backup Withholding
- The taxpayer must use the Taxpayer Identification Numbers (TINs) to associate and verify the amounts he reports to the IRS with corresponding amounts on tax returns. Thus, it is important for the taxpayer to report correct names, social security numbers (SSNs), individual taxpayer identification numbers (ITINs), employer identification numbers (EINs), or adoption taxpayer-identification numbers (ATINs) for recipients on the forms sent to the IRS.
- The IRS requires taxpayers to request the recipients to complete the appropriate Form W-9 in case the he recipient is a U.S. person (including a U.S. resident alien). The appropriate form includes Form W-9: Taxpayer Identification Number and Certification, or Form W-9S: Request for Student’s or Borrower’s Taxpayer Identification Number and Certification. In case the recipient is a foreign person, the the taxpayer must request the recipient to complete the appropriate Form W-8.
- A taxpayer may have to pay a penalty for an incorrect or missing TIN on an information return.
- In case the recipient does not provide a TIN, the taxpayer must leave the box for the recipient’s TIN blank on the Form 1099-K. However, the taxpayer is required to collect a backup withholding at a 24% rate on the payment amount. In case the taxpayer fails to collect and pay over backup withholding from affected payees, then the taxpayer may become liable for any uncollected amount. Also, some payees are exempt from backup withholding. The taxpayer must refer to Form W-9 to view the list of exempt payees.
- A taxpayer needs to apply for backup withholding in case:
- The payee fails to furnish the TIN in the required manner
- The taxpayer receives a notice from the IRS that payee’s TIN is incorrect
- The taxpayer receives notice from the IRS that the payee is subject to backup withholding due to notified payee underreporting
- The payee fails to certify that he or she is not subject to backup withholding
- The taxpayer needs to report backup withholding on Form 945: Annual Return of Withheld Federal Income Tax. In addition to this, he or she must also report backup withholding and the amount of the payment on Forms 1099-K. The taxpayer is required to do this even if the amount of the payment is less than the amount for which an information return is normally required.
The above change will require TPSOs to file more Forms 1099-K in a given year. Only the organizations selling ‘goods and services as per the legislation need to report information returns to the IRS. This means that organizations that do not facilitate commercial activities do not have an obligation to report.
However, the reduction in the reporting threshold will affect the onboarding practices of many TPSOs, specifically the process for collecting TINS that previously were based on higher thresholds. Failure to recognize the need for collecting TINs earlier in the TPSO relationship could expose organizations to excessive backup withholding obligations or liability if proper information is not obtained or the withholding is missed. To know further details on how to file Form 1099-K in 2022, you can refer to the instructions page on the IRS website.
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