What are Merchant Category Codes (MCCs) and how are they used to determine if companies are subject to IRS reporting

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In 2004 the Internal Revenue Service (IRS) published an optional revenue procedure that allows users of commercial payment products to use Merchant Category Codes (MCCs) to determine which payment card transactions are reportable to the federal government on IRS Form 1099-MISC (Miscellaneous Income).

Organizations and government agencies using commercial payment products to
pay for services are required to report payments to the IRS. Historically, determining which payments were for services and which were for merchandise was an difficult, time-consuming process that frequently required a review of individual transaction detail. This IRS revenue procedure and “MCC List” takes the guesswork out of this process allowing cardholders to determine reportable payments based on the supplier’s MCC.

In general, this revenue procedure classifies businesses by Merchant Category Codes (MCCs) according to whether they predominantly furnish services (for which payments are reportable) or predominantly provide goods (for which payments are not reportable). A payment card organization may assign MCCs, or equivalent Industry Codes, to merchant/payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent Industry Code assigned to a merchant/payee. A cardholder/payor may then rely on the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with that merchant/payee is subject to reporting under section 6041 or section 6041A.

Virtual Cards are no different than physical credit cards in this manor. Each virtual card payment is tied to a merchant classification code (MCC), used to classify the business by the type of services or products it supplies. These can be used to help identify which transactions need to be reported to the IRS, thus assisting with proper transaction identification and tracking. Merchant ID’s are also captured and used to trace subsequent authorizations.

For a detailed explanation of the Merchant Category Codes and how thy are used to determine reportable payment card transactions, refer to the article below on the IRS government pages.

http://www.irs.gov/irb/2004-31_IRB/ar17.html

If you have other uses or applications for MCCs, please let us know.

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