How Does the IRS Classify a Merchant Acquiring Entity and What Reporting is Required?

IRIS CRM Blog, ISOs, Onboarding, Residuals, Sales Efficiency
How Does the IRS Classify a Merchant Acquiring Entity

Reporting is a big deal in the payments industry for obvious reasons. But with acquiring banks, payment processors, independent sales organizations, and merchants all playing a roll in getting money from point A to point B, even with the kind of advanced reporting and sales tools provided by platforms like IRIS CRM, keeping track of who has to report what can be hard to understand. One common area of confusion is what responsibility third parties have in reporting the sales data of their merchants. In this article, we’ll look to clear that up by explaining what the IRS considers a merchant acquiring entity, what MAEs are responsible for reporting, and why. 

 

What is a Merchant Acquiring Entity?

A merchant acquiring entity is a bank or payment processing organization that processes payment card transactions on behalf of a merchant (known to the IRS as a “payee”), alerts the merchant of transaction acceptance, and facilitates the transfer of funds from the buyer’s account into the merchant account of the seller. Outside of the IRS, these organizations are generally referred to as merchant banks or acquiring banks. These organizations specifically deal with electronic payments made through debit and credit cards, in contrast with third-party settlement organizations that also act as a middle-man, but are pure facilitators who use their own acquiring bank accounts to pass transactions between buyer and seller. 

 

What Reporting are MAEs Required to Submit?

The difference between merchant acquiring entities and third-party settlement organizations is important, because the two types of organization have similar, but different reporting responsibilities with the IRS. Merchant acquiring entities are responsible for reporting the gross amounts of reportable transactions for each of the merchants they process transactions for, regardless of the amount of business any given merchant does. In contrast, third-party organizations only need to report for merchants whose gross sales exceed $20,000 and/or 200 total transactions. 

In both cases, the reporting is submitted through IRS form 1099-K, which covers each merchant’s vital business information, taxpayer identification number (TIN), and the gross sales amounts on a monthly and annual basis. 1099-K forms can be submitted electronically, in which case they’re due by March 31st. If submitted in hard copies, forms must be submitted by February 28th

 

Why Are 1099-K Forms Important?

While submitting this data to the IRS may seem redundant or an unnecessary burden, it serves an important function. Much like the IRS can verify personal income tax amounts thanks to the submission of relevant data by employers, the submission of 1099-K forms by MAEs provides the IRS with a means to verify taxes owing on merchants’ annual sales. Additional reporting and verification plays an important role in minimizing tax avoidance and improving voluntary compliance. 

 

As an ISO, you may have reporting responsibilities, either in the form of a 1099-K, or a payee statement that must be delivered to your merchants by the end of each January. Whatever your reporting responsibilities maybe, having access to a robust reporting suite that makes accessing the specific information you need on a portfolio-wide and merchant-by-merchant basis is crucial – and that’s exactly what IRIS CRM delivers. 

For more information on IRIS CRM’s advanced reporting and analytics suite, and how it can help your ISO fulfill your reporting duties, make better strategic decisions, and grow your residuals, visit IRISCRM.com to schedule a free demonstration today