What YOU need to know about IRS Form 1099-K Payment Card and Third Party Network Transactions

Disclaimer, I am not a Tax Professional, seek professional advice (or help) before employing any strategies you see on Saverocity.com

A 1099-K is a specific variation of the 1099 that pertains specifically to transactions involving payment card and transactions through third party networks.

The 1099-K scares people, striking fear in the heart of any person who does not have a business that for reasons they would rather not explain makes a lot of transactions online; this often will mean people who for example leverage electronic payments to generate manufactured spend using sites like Amazon Payments, Google Wallet, Paypal and Square Cash.

Understanding the purpose of a 1099

A 1099 is issued by a third party from them to the IRS, with a copy sent to you as notification of the event.  The purpose of this paperwork transaction is to encourage the receiver to report income consistent with what has been indicated on the 1099 (or a series of 1099s) it is paramount to realize that if you received income that did not generate a 1099 this does not mean you do not have to report it! All income must be reported. Read more here in The Truth about 1099’s

The IRS view on credit card rewards

Part IV

Items of General Interest

Frequent Flyer Miles Attributable to Business or Official Travel

Announcement 2002-18

Most major airlines offer frequent flyer programs under which passengers
accumulate miles for each flight. Individuals may also earn frequent flyer miles
or other promotional benefits, for example, through rental cars or hotels. These
promotional benefits may generally be exchanged for upgraded seating, free
travel, discounted travel, travel-related services, or other services or benefits.

Questions have been raised concerning the taxability of frequent flyer miles or
other promotional items that are received as the result of business travel and
used for personal purposes. There are numerous technical and administrative
issues relating to these benefits on which no official guidance has been provided,
including issues relating to the timing and valuation of income inclusions and the
basis for identifying personal use benefits attributable to business (or official)
expenditures versus those attributable to personal expenditures. Because of
these unresolved issues, the IRS has not pursued a tax enforcement program
with respect to promotional benefits such as frequent flyer miles.

Consistent with prior practice, the IRS will not assert that any taxpayer has
understated his federal tax liability by reason of the receipt or personal use of
frequent flyer miles or other in-kind promotional benefits attributable to the
taxpayer’s business or official travel. Any future guidance on the taxability of
these benefits will be applied prospectively.

This relief does not apply to travel or other promotional benefits that are
converted to cash, to compensation that is paid in the form of travel or other
promotional benefits, or in other circumstances where these benefits are used for
tax avoidance purposes.

For information regarding this announcement, call (202) 622-4606 (not a toll-free
number). Alternatively, taxpayers may transmit comments electronically via the
following e-mail address: Notice.Comments@irscounsel.treas.gov. Please
include “Announcement 2002-18″ in the subject line of any electronic
communications.

The De Minimis Rule

The IRS ignores transactions that are considered too small to worry about, this applies at different levels for different things, when talking about the 1099-K the De Minimis rule you will see is as follows:

Enter in box 1 the gross amount of the total reportable
payment card/third party network transactions for the
calendar year. 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.
Exception for de minimis payments. A TPSO is required
to report any information concerning third party network
transactions of any participating payee only if for the calendar
year:
The gross amount of total reportable payment transactions
exceeds $20,000, and
The total number of such transactions exceeds 200.

This can be seen on Page 4 of the IRS Instructions for form 1099-K

Understanding Issue Requirements

If Amazon Payments did issue you a 1099-K it does not mean you would owe taxes, but it does mean you would have to explain to the IRS what was happening and likely that would occur in the form of an Audit, which are best avoided.

As a person who is currently operating multiple Amazon Payments accounts my ‘reportable payment transactions’ already exceed $20,000 per year in manufactured spending, however, the rule states that the number of transactions must also exceed 200.  One without the other does not trigger a 1099-K.

Understand that even though Amazon Payments may be allowing me to operate more than the standard number of accounts, but they are under the same SSN, therefore I should consider adding up total value and total transactions rather than look at each individually.

However, each Payment Settlement Entity (PSE) is standalone, therefore if I complete 190 transactions with Amazon Payments with $100,000 in value over 10 AP accounts, along with 11 transactions with Paypal this does not trigger a 1099-K request.

It is worth noting that the issuing of a 1099-K can happen at any level of transaction, even just one.  However the transaction company is only required to do it when you meet the 200 transactions and $20,000 per year limit. Most companies tend to do only what is required of them, but that doesn’t mean that their internal policies dictate the issuance of the form earlier- in other words it could happen, but it’s not so likely.

Conclusion

• The purpose of Form 1099-K is to ensure that businesses that are receiving income are properly reporting their income for tax purposes.
• If you do have a business, but are under the de minimis rules for sending out 1099 or 1099-K that does not mean you do not have to report business income.
• If you do not own a business but have received income you must report this income even if you have not received a 1099 or 1099-K
• The IRS does not view Credit Cards rewards as taxable income, so if you received a 1099-K they are not coming after your points.