Reporting Credit Card and App Payments to the IRS

Since 2011, the IRS has required reporting of business income received through payment cards. If your business accepts payments via credit, debit, or stored value card, or through third-party settlement organizations (e.g., PayPal), each service provider that processes these transactions may be obligated to submit information about them to you and the IRS.

The Law 

Internal Revenue Code section 6050W(c)(2) requires that payment settlement entities (merchant acquirers and third-party settlement organizations like payment app providers) report annual gross payments they've processed to the IRS, as well as to the businesses who received them. Payments are reported using Form 1099-K. Copies of the form are sent to both the merchant and to the IRS.

Details of Credit Card and Payment App Reporting

Payment settlement services must report gross annual receipts for each merchant. For merchant acquirers, the income reporting applies to "any transaction in which a payment card is accepted as payment," according to the IRS. For third-party settlement organizations, reporting applies to business payments made for goods and services.

Exception for De Minimis Payments

In IRS terms, "de minimis" generally means that an event is tax-neutral.

Credit Card and Debit Card Payments

The de minimis payment rule says payments made by payment card acquiring merchants do not have to issue Form 1099-K if:

• A merchant's total payment transactions for the year don't exceed $20,000.
• The merchant's total number of transactions does not exceed 200.

So if you received credit card payments at or under those amounts, you won't receive a 1099-K.

Payments Through P2P Apps

Prior to the 2022 tax year, the de minimis rule for third-party settlement entities such as PayPal, Zelle, and Venmo were the same as for merchant acquirers: The threshold for issuing a 1099-K for payees was that there were more than 200 transactions during a calendar year that, combined, totaled $20,000.

But for 2022, that threshold has been lowered to $600, regardless of how many transactions they processed. So if you receive payments for goods or services worth more than $600 through one of these types of providers, you will receive a 1099-K.

Tips for Reporting Credit Card and App Payments

Small businesses should regularly review and update their bookkeeping and accounting practices to make sure they can reconcile the 1099 forms submitted by the payment settlement companies when they receive copies. Any discrepancies in reporting must be addressed, so accurate tax returns can be filed with the IRS.

Further details regarding credit card merchant account and payment app reporting are outlined in regulations issued by the Internal Revenue Service in n-09-19, Information Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions (although that document contains outdated information about the de minimis rule for third-party settlement companies). It's still worth checking out because the IRS details who is responsible for reporting, how gross amounts are calculated, and it states that merchant payment firms can be required to withhold funds for backup withholding.

The IRS has also released instructions for Form 1099-K. Business owners and accountants should review this form to familiarize themselves with the format.

Keep Track of Chargebacks

The law requires that payment settlement providers must report gross or total receipts, but merchants often have chargebacks where the card provider reverses a transaction due to fraud or because of some dispute. Merchants can issue refunds, or they might have debit card transactions where the customer receives cashback.

Payment transaction services report only gross monthly and annual payments. Fees, chargebacks, refunds, and other similar items are not netted against gross amounts for IRS reporting purposes, and this can higher receipts being reported than were received.

Businesses should have thorough accounting procedures in place to keep track of these transactions separately. In other words, if you're accustomed to recording only a net deposit from a merchant account, it would be wise to separate those net amounts into gross receipts and the associated fees and refunds so your internal financial reports can be more easily reconciled to Form 1099-K.

Report Your Merchant Identification to Providers

Merchants must provide their payment processor with the full legal name of their businesses, their addresses, and their taxpayer-identification numbers so financial institutions can report credit card and debit card receipts. For most businesses, the taxpayer identification number would be their employer identification number or EIN. Payment processors might ask businesses to provide them with Forms W-9 so they can obtain this information.

Possible Backup Withholding Issues

Merchants who fail to provide their taxpayer identification numbers could become subject to backup withholding on their payments at a rate of 24%. Merchants should provide their payment services provider with their names, addresses, and EINs to prevent backup withholding because it can leave a business in severe financial straits. Business owners who are struggling with tax debts should work with a tax professional to develop a repayment strategy that prevents any withholding on their card or app payments.

Frequently Asked Questions (FAQs)