1099 Reporting for Contractors using a Credit Card

IRS Reporting Requirements for Third Party Payments on 1099-K or 1099-MISC

Your Pain:  Assumption is that you need to send your Vendor a 1099 Form and when you use the QuickBooks Wizard your Subcontractor Vendor doesn't show up on those Vendors you paid using payment types such as debit card, credit card or third party networking companies, like PayPal.  Note:  If you paid your 1099 recipients with cash or check then you do need to provide a 1099-MISCto Vendor.

When did this change?  Beginning with tax year 2011, the IRS required you to exclude certain payment types you made to a 1099 vendor on Form 1099-MISC that will be included on third party payment processors “Merchant Acquiring Entity” such as credit card companies, PayPal etc. on forms 1099-K.

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 make payment to a merchant or other business, known as a "participating 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 participating payee's account.

What qualifies as a "payment card?'

The term payment card includes credit cards, debit cards, and stored-value cards, as well as payment through any distinctive marks of a payment card (such as a credit card number).

A payment card is issued 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.

Who is responsible for reporting payment card transactions?

The merchant acquiring entity that submits the instructions 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 that may share the contractual obligation to pay the merchant. When both a merchant acquiring entity and a processor have a contractual obligation to pay the merchant, the entity that submits the instructions to transfer funds to the merchant's account is responsible for preparing and furnishing a payee statement to the participating payee and filing the Form 1099-K with the IRS.

A form that is now required for third party payment processing companies, credit card processors, PayPal, etc. to report payments that have been processed to vendors and contractors.
 
Who reports payment card transactions when a payment settlement entity contracts with a third party, such as an electronic payment facilitator, to settle reportable transactions?

The entity submitting the instructions to transfer funds to the participating merchant's account is responsible for reporting payment card transactions. In this case, the third party entity is responsible for reporting, because it is the entity submitting the instructions to transfer the funds in settlement of the transactions such as, AMEX, Visa & Master Card and PayPal.

What is a Merchant Category Code (MCC)?

An MCC is a four-digit number used by the payment card industry to classify businesses by the goods of services they provide. There are approximately 600 MCCs representing different types of businesses. Some examples are: 441- Cruise Lines; 5462 - Bakeries; and, 5532 - Automotive Tire Stores.

How should transactions be reported if a merchant has receipts classified under more than one MCC?

If a merchant has receipts classified under more than one MCC, the reporting entity may either:

File separate Forms 1099-K reporting the gross reportable transaction amounts attributable to each MCC, or

File a single Form 1099-K reporting gross reportable transaction amounts and the MCC that corresponds to the largest portion of total gross receipts.

Additionally, 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 that most closely corresponds to the description of the payee's business.  

Note: 1099-MISC is due to IRS & Vendor by February 1, 2016

Source: https://www.irs.gov/uac/Payment-Card-Transactions-FAQs
IRS Page Last Reviewed or Updated: 15-May-2015