A third-party settlement organization is the central organization that has the contractual obligation to make payments to participating payees (generally, a merchant or business) in a third party payment network.
Characteristics of a third-party payment network include:
- The existence of a central organization with whom a substantial number of providers of goods and services (who are unrelated to the central organization) have established accounts
- an agreement between the central organization and the providers to settle transactions between the providers and purchasers
- the establishment of standards and mechanisms for settling such transactions, and
- 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 as only 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.
For additional information see the IRS Third Party Network Transactions FAQs