Third-Party Network Transactions FAQs
What is a third-party settlement organization?
A third-party settlement organization is a central organization that has the contractual obligation to make payments to participating payees (generally, a merchant) in a third party payment network. Characteristics of a third party payment network include: (i) the existence of a central organization with whom providers of goods and services have established accounts, (ii) an agreement between the central organization and providers to settle transactions between the providers of goods and services and purchasers, (iii) the establishment of standards and mechanisms for settling such transactions, and (iv) the guarantee of payment in settlement of such transactions. The most common example of a third-party settlement organization is an online auction-payment facilitator, which operates merely as an intermediary between buyer and seller by transferring funds between accounts in settlement of an auction/purchase. Third-party settlement organizations charge sellers a fee for facilitating the transaction. Under the reporting requirements, these entities must report the gross reportable transactions of the businesses to which they make payments provided the payee satisfies certain transaction volume and dollar thresholds.
Who is responsible for reporting third party network transactions?
The third-party settlement organization or an electronic payment facilitator is responsible for reporting the gross amounts of reportable transactions paid to participating payees in their network.
Does an automated-clearing house qualify as a third-party settlement organization?
No. An automated-clearing house merely processes electronic payments between buyers and sellers through wire transfer, electronic checks and direct deposit. Further, there is no contractual relationship between the automated-clearing house and payees. Thus, an automated-clearing house does not qualify as a third-party settlement organization and payments on its network are not reportable.
Does a third party settlement organization have to report MCC Codes?
No. Third-party settlement organizations do not use MCC codes to classify payees. Box 2 on the Form 1099-K should not be completed by third-party settlement organizations.
