Merchant Card Transactions FAQs
What are payment settlement entities?
In merchant payment card transactions, a payment settlement entity is a domestic or foreign entity that is a merchant acquiring entity.
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 pay the participating merchant/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 account of the payee.
Who is responsible for reporting merchant card payments?
The entity that submits the instruction 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, which may share the contractual obligation to pay the merchant. When both a merchant acquiring entity and a processor have contractual obligations with the merchant to pay, the entity that submits the instructions to transfer funds to the account of the participating merchant is responsible for preparing and submitting Forms 1099-K to the payee and the IRS.
Who reports merchant card payments when a payment settlement entity contracts with a third-party, such as an electronic payment facilitator, to settle reportable transactions?
Whenever a payment settlement entity contracts with a third party, such as an electronic payment facilitator, to submit instructions to transfer funds to the account of the participating merchant in settlement of reportable payment transactions, reporting is required by the third party. The third-party need not have any agreement or arrangement with the participating merchant and the payment need not come from the third-party’s account in order to trigger reporting. Two examples of entities that could be an electronic payment facilitator are:
- A processor who processes transactions for a merchant acquiring bank and submits instructions to transfer funds to payee’s account but does not have a contractual obligation to pay the merchant.
- A sponsoring bank that submits the instructions to transfer funds to an ACH network on the processor’s or merchant acquiring bank’s behalf.
What is a Merchant Category Code (MCC)?
A Merchant Category Code (MCC) is a four-digit number used by the card payments industry to classify payees. The IRS reporting requirement specifies the reporting of MCC’s according to bankcard industry standard definitions. There are approximately 600 MCCs representing different types of businesses (e.g. 4411 – Cruise Lines, 5462 – Bakeries, 5532 – Automotive Tire Stores). 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 which most closely corresponds to the description of the payee’s business.
What should be reported if a merchant has receipts classified under more than one MCC?
For 2011, if a merchant has receipts classified under more than one MCC, the reporting entity may either:
- File separate Forms 1099-K reporting the gross receipts attributable to each MCC, or
- File a single Form 1099-K reporting total gross receipts and the MCC which corresponds to the largest portion of total gross receipts.
