Tax & Accounting Blog

Form 1099-K and Backup Withholding of Federal Tax: A New Threshold Established by the IRS

ONESOURCE, Tax Information Reporting, Trust Tax June 21, 2011

IRS Notice 2011-42 creates a new rule that affects backup withholding of federal income tax on some of the payments that are reportable on Form 1099-K, Merchant Card and Third-Party Network Payment.  2011 is the first year for Form 1099-K reporting under section 6050W of the Internal Revenue Code.  Payment settlement entities are required to report gross amounts paid to merchants and others who receive payments through the acceptance of credit cards and other payment cards, or receive payments through settlement organizations for third-party network transactions.  Then, beginning in 2012, the payer is require to backup withhold on Form 1099-K reportable payments if the payee fails to furnish a taxpayer identification number or if the payee furnishes an incorrect taxpayer identification number.

Notice 2011-42 provides a threshold for backup withholding by a third-party settlement organization.  The third-party settlement organization will only impose backup withholding on a payee if the payee has received payment from that third-party settlement organization in more than 200 transactions within a calendar year.

This is a different threshold than the one that third-party settlement organizations must track for the preparation of Form 1099-K.  Payments made in settlement of third-party network transactions are required to be reported on the 1099-K if the aggregate number of transactions exceeds 200 and the amount to be reported exceeds $20,000 with respect to that payee within a calendar year.  The monetary threshold of $20,000 is not considered for purposes of determining backup withholding obligations.

This Notice specifically applies only to third-party settlement organizations.  Payments made in settlement of payment card transactions do not have any limiting threshold for imposing the backup withholding requirement.