1099-K reporting for DTC agencies in 2026

DTC agencies that "just throw it on our Stripe for the client" end up with a structural tax problem they often don't see until year 3. The agency receives 1099-K for the full pass-through flow. Revenue recognition gets complicated. IRS matching flags the agency's return for "unreported" revenue because the 1099-K shows $20M and the tax return shows $2M (agency fees only).

This is fixable, but fixing it retroactively is expensive. Preventing it at structure level is cheap.

The agency 1099-K problem in one paragraph

Client's ecommerce site uses agency's Stripe. Customer pays $100. Stripe deposits $97 (minus fees) to agency's bank. Agency invoices client for $10 agency fee, pays client $87 via ACH. At year-end, Stripe issues 1099-K to agency for $X million gross. Agency's income is agency fees only. IRS sees mismatch.

Why this fails

Tax reporting accuracy

Agency's corporate return shows revenue from agency fees. The 1099-K gross is much larger. Schedule C or Form 1120 can document "reported gross receipts" with explanation, but IRS matching algorithms flag the gap.

Audit exposure

IRS increasingly focuses on payment-facilitator structures. Flagged returns trigger correspondence audits. Correspondence audits usually resolve but cost accounting time and sometimes require professional response.

State tax complications

State revenue departments receive 1099-K copies. States where the agency is registered chase "unreported" revenue too.

Sales tax

If the agency's Stripe is the merchant of record, the agency may be responsible for collecting + remitting sales tax on client sales — a liability the agency often didn't plan for.

Clean structures that avoid the problem

Client-owned MID

Each client has their own merchant account in their own entity name. Stripe (or other processor) issues 1099-K to the client. Agency invoices separately. Agency's 1099-K is for agency fees only (or no 1099-K if agency bills via ACH/wire).

• Pros: clean tax, clean sales tax, clean ownership.
• Cons: slower onboarding, agency doesn't control checkout, harder to pull agency fee if client bank defaults.

Sub-merchant platform

Agency runs a platform with the acquirer. Each client is a sub-merchant. Acquirer issues 1099-K to the sub-merchant (client), not to the agency.

• Pros: fast onboarding, agency has control over platform-level rules, clients get their own 1099-K.
• Cons: requires acquirer that supports sub-merchant 1099-K, platform-level underwriting more involved than client-MID model.

Payfac registered with IRS

Agency registers as a payment facilitator. Agency issues 1099-K to sub-sellers (clients) under TIN. This is the "Etsy" model.

• Pros: agency controls the platform fully, clients get 1099-Ks with matching TIN.
• Cons: money-transmitter licensure exposure (state-by-state), significant compliance infrastructure, typically only worth it above $100M/year GMV.

Migration playbook

If you're currently running pass-through on agency-owned Stripe and want to fix it:

Step 1 — inventory

List every client currently routing through agency Stripe, their monthly volume, and their entity status (have they formed an entity? do they have a bank account?).

Step 2 — client communication

Explain the structural change. Most clients welcome it because they lose the "agency controls my revenue" exposure. Some resist because they rely on agency to own the technical complexity. Offer migration support.

Step 3 — new structure

For scale: migrate to sub-merchant platform with high-risk-capable acquirer if vertical mix includes high-risk clients. For small agency: help each client open their own MID.

Step 4 — transition period

Run both structures in parallel for 60-90 days. Migrate clients one at a time. Validate 1099-K will issue to client, not agency, at year-end.

Step 5 — year-end verification

January, confirm each client received their 1099-K and agency's 1099-K matches agency fees only.

Tax treatment of the transition year

Transition-year is messy:

• Portion of year on agency-owned Stripe (agency receives 1099-K for that portion)
• Portion on sub-merchant (client receives 1099-K for their portion)
• Agency's tax return needs to reconcile the partial-year 1099-K against partial-year pass-through revenue

Work with your CPA early. Document the transition. Clean by year 2.

Chargebacks and refunds during transition

Charges processed on agency's Stripe can chargeback after migration. These hit agency's account. Budget for chargeback tail risk 180+ days after migration. Clients should be on the hook contractually for chargebacks on their revenue even if it hit agency's account.

Sales tax considerations

Pass-through agency structures often inadvertently assume sales tax collection + remittance obligations. Clean structures (client-MID, sub-merchant) put sales tax where it belongs — with the client/sub-merchant.

Migration is also a sales tax cleanup opportunity. Many agencies discover they've been under-collecting state sales tax during years of pass-through operation.

Client contract updates

Agency master agreements written for the pass-through era need updates for sub-merchant era:

• Client responsible for their sub-merchant underwriting cooperation
• Client owns 1099-K and tax reporting
• Client owns chargebacks on their volume
• Agency's fee structure clearer (% of GMV vs flat platform fee)
• Offboarding process defined (sub-merchant closure, subscription migration)

What not to do

• Don't keep running pass-through while promising clients "we'll fix it next year." IRS enforcement is already live.
• Don't issue 1099-MISC from agency to client to "offset" the 1099-K agency received. IRS matches by TIN and flags the mismatch.
• Don't migrate all clients at once. Stagger over 60-90 days.
• Don't ignore chargeback tail. Budget reserves for 180+ days post-migration.

What to do next

If you run pass-through: audit 1099-K exposure for the current year. If agency's 1099-K gross exceeds agency's reported revenue by 3x or more, structure fix is worth serious planning.

Our application covers agencies exploring sub-merchant platform structure. See also DTC agency payment stack.