The IRS offers 30 questions and answers at http://www.irs.gov/pub/irs-utl/irdm_section_6050w_faqs_7_23_11.pdf to help explain who has an obligation to file information returns for 2011 under the rules for Section 6050W of the Internal Revenue Code (I.R.C.), and when and how to file those new Form 1099-K information returns.
If you are one of the many Tax, Operations, and Accounts Payable professionals with open questions on 6050W and Form 1099-K, we suggest bookmarking that IRS FAQ page for reference. It may not answer all of your questions, but the Q&A format makes it a convenient reference to use in addition to the 62 pages of tax regulations for Section 6050W (TD 9496).
From the beginning of this year, tax compliance for Form 1099 reportable payments made through payment cards and third-party electronic payment networks is governed by I.R.C. Section 6050W. Effective with payments made on and after January 1, 2011, a merchant bank or card organization is required to report to the IRS the gross amounts paid over to merchants. This reporting requirement is also imposed on third-party networks, but with a de minimis dollar amount exception. For many payers, it seems easier to identify a 6050W compliance obligation as a merchant bank processing credit card transactions than to identify a 6050W compliance obligation as a third-party settlement organization making payments under a contractual agreement with multiple unrelated parties in a payment network.
Such a third-party payment network uses an agreement or arrangement in which:
- Accounts are established with a central organization that has a substantial number of unrelated providers of goods or services who agree to settle transactions for the provision of goods or services in accordance with the agreement or arrangement.
- The arrangement provides for standards and mechanisms for settling transactions.
- Payment is guaranteed to the providers of the goods and services in settlement of transactions with the purchasers who buy through the network.
Some organizations that may not have expected to be pulled into section 6050W and Form 1099-K reporting have realized that they are, after all, included. Some examples are: a processor of transactions for certain stored-value cards that can be used at a network of places unrelated to the issuer and unrelated to each other (such as mall cards, campus cards used at non-university locations, and benefit cards used at locations unrelated to the government or organization that issues the card); a franchisor that processes credit card transactions for its independently owned franchised stores; a processor of payments through a health care network to unrelated providers in a self-insured arrangement for a company, where each payment transaction utilizes self-insurance funds passed through the processor (this is different than the payment of health insurance premiums, and payments from a health insurance plan funded by premium payments do not fall under Section 6050W and Form 1099-K reporting).
If you have a Form 1099-K reporting obligation, it’s necessary to track payments in 2011 in a manner that will facilitate reporting 12 monthly gross payment amounts, in addition to a total for the year, on the Form 1099-K.
Backup withholding will be required beginning in 2012 for these 1099-K reportable payments above a de minimis threshold, if a TIN has not been provided by the payee or if the TIN is incorrect. The current IRS FAQs don’t address the backup withholding requirement.