What are payment settlement entities?

Payment Settlement Entities (PSEs) are organizations that process payments and settle transactions for others and are required to report certain payment transactions to the IRS. Their primary reporting obligation is issuing Form 1099-K, Payment Card and Third Party Network Transactions, to both the IRS and the payee.

Types of Payment Settlement Entities

Under federal tax rules, there are two main categories of PSEs:

Merchant Acquiring Entities (MAEs)

These entities process payment card transactions, such as:

• Credit cards
• Debit cards
• Stored-value cards

Examples: traditional credit card processors and acquiring banks that settle card payments for merchants.

Third-Party Settlement Organizations (TPSOs)

These entities facilitate payments through third-party networks or platforms, including:

• Online marketplaces
• Payment apps
• Peer-to-peer platforms

Examples: platforms like PayPal, Stripe, Square, Venmo, Cash App, Etsy, and similar services when they settle payments on behalf of sellers.

What PSEs Are Required to Do

PSEs must:

• Track gross payment amounts processed for each payee
• Issue Form 1099-K to the payee (business or individual)
• File Form 1099-K with the IRS

Importantly:

• Amounts reported are gross payments, not net income
• Fees, refunds, chargebacks, and taxes are not deducted on Form 1099-K

When a PSE Must Issue Form 1099-K (Federal Rules)

For tax year 2025 reporting:

• A PSE must issue Form 1099-K if gross payments exceed $600, regardless of the number of transactions

This rule applies to both:

• Payment card transactions, and
• Third-party network transactions

What Form 1099-K Means for Taxpayers

Receiving a Form 1099-K:

• Does not automatically mean the amount is taxable income
• Requires the taxpayer to:
  
  • Reconcile gross receipts
  • Subtract deductible expenses, refunds, and non-income items
  • Properly report income on the correct tax return (Schedule C, Form 1065, Form 1120-S, etc.)

Common non-taxable items reported on a 1099-K may include:

• Personal reimbursements
• Returned merchandise
• Sales tax collected and remitted
• Transfers between personal accounts

Summary

• PSEs are entities that process and settle payments
• They include card processors and payment platforms
• They must issue Form 1099-K when payments exceed $600
• Reported amounts are gross, not profit

Sources:

• IRS - Form 1099-K Overview
• IRS – Understanding Your Form 1099-K
• Internal Revenue Code § 6050W
• Treasury Regulations § 1.6050W-1