Do you use Paypal to accept funds? Do you live in the United States or otherwise have to pay taxes to the U.S. government? Then you should be aware of upcoming changes for Paypal and other payment processors resulting from the 2008 law IRS 6050W. In short, Paypal and those other processors might start tracking and reporting your income to the Internal Revenue Service (IRS).
Not every Paypal user will be affected, and the first reports to the IRS will happen in early 2012 (covering your 2011 income). Here’s some background on the 2008 law leading to these changes and what they might mean for you and your business.
Paypal will report your earnings to the IRS if you meet both of the following requirements:
This would affect any users in the U.S. or those with businesses registered in the U.S. It would also include those living overseas if they’re still U.S. citizens and required to report their earnings.
What if you have multiple Paypal accounts and they meet the requirements when combined, but not when counted separately? Paypal will still report your income to the IRS. So don’t think that using multiple accounts will get you around the reporting requirements.
If you are a citizen of another country and have absolutely no ties to the U.S. tax system, you shouldn’t be affected by the reporting change.
Also, if you only meet one of the two requirements listed above, you will not be affected.
The 1099 form series from the IRS is used to report income earned as an independent contractor or in other miscellaneous non-wage ways. Paypal will use 1099 forms to report income received through their system if you meet the requirements.
Start by reviewing the current year’s transactions to see if you meet the requirements. If you do, you’ll be asked to submit your identification number to Paypal for reporting purposes — your social security number (SSN), employer identification number (EIN), or taxpayer identification number (TIN).
Don’t assume you can get around the reporting requirements by switching to a different payment processor. The law doesn’t only apply to Paypal. Any payment processor you use will be required to report your earnings if you meet the requirements.
If you use a personal or premiere account with Paypal, you might also be required to upgrade to a business account if you meet the requirements. The account change is free.
If you don’t give Paypal the requested identification number, your Paypal account might be limited until you do. If you use other payment processors, check with them to find out how long you have to comply and what will happen if you don’t.
I’ll be affected by this change, and there are a couple of issues that come to mind — ones I haven’t seen adequately addressed elsewhere. Here’s some background so you’re aware of them as well.
Find out today if the new rules might apply to you. Visit Paypal’s reports page (like the one below — my personal earnings information was blocked out) and review your monthly sales reports. There you can find out how much you’re earning in 2010, and how many sales transactions you process each month.
In the end, you were always required to report your income, 1099 or not. So it shouldn’t affect you too greatly. But if you’re concerned about the potential reporting issues mentioned above, it’s strongly suggested that you speak to a financial services, legal, or tax professional for more personal advice.
If you’d like a preview of the new 1099 form that will be used, you can visit the IRS website to view a draft of the 1099-k.
Disclaimer: Information in this article is for educational purposes only, and neither the author nor the website’s owner may be held responsible for any real or perceived damage caused by, or allegedly caused by, the information contained in this article. The author is not engaged in offering legal, financial, or other professional services or advice. If further information or more individual information is needed, it is suggested that the reader consult with a qualified tax professional.
image via: paypal-media.com
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OK, So suppose I have 18,000 in Paypal sales. I now quit selling so I don't go over the limit. My Paypal account is close to a zero balance BUT , I buy some things and need to infrequently add funds to Paypal from my Bank account to pay for them. After 3 months, I see that I've added $3,000 from my bank into Paypal. Is that 3,000 tacked onto the previous 18000 i received in payment thus putting me over the 20K threshold? I.e., Do personal transfers from your Bank Account go toward the 20K threshold for reporting to the IRS? Thanks
No. Please review the information already posted and the link given to Paypal's official details. As we've discussed before, only payments for goods and services apply -- not transfers from your own bank account. But remember. Just because Paypal doesn't submit a 1099 for you, it doesn't mean you don't have to report the income.
If I dont provide an SSN/ITIN, Paypal will prevent me to withdrawn the money on the account? Or they will just limit the account to prevent more funds to be charged to it? Thanks.
What about if you give someone a "Donation" by clicking on that special button they have posted to "support their server costs for free youtube informational videos" This website isn't a Non-Profit, It's obviously a person looking to collect some cash for their knowledge of how to fix some programming problems. If they go over the 200/20K PayPal rule, will they be reported to the IRS?
Technically the donation button for Paypal isn't meant to be used in that way. It's meant for nonprofit and fundraising use only. From their website:
"Note: This button is intended for fundraising. If you are not raising money for a cause, please choose another option. Nonprofits must verify their status to withdraw donations they receive. Users that are not verified nonprofits must demonstrate how their donations will be used, once they raise more than $10,000."
Your server expenses are not a "cause." So any income would be business income, and they should be reporting that. Whether they do or not, the site owner should be reporting that income once they hit $600. I just saw one person's story where Paypal actually told them they had to refund the "donations" they'd received because they weren't a charity and weren't authorized to fundraise on behalf of a legitimate charity. They eventually backed down about the "wrong button" being used due to public heat in that case. But based on what I'm seeing on the site, your example still wouldn't fly. You'd want to use a typical buy-now style link instead of a donate button (kind of like the "buy me a beer" links at the end of some blog posts). In the end, income is income and it should be reported. If you're unsure about your personal use of the donate button, your best bet is to ask a Paypal rep to review it for you.
where in paypal can I find the total number of payments I have received? Cant seem to find that easily or do i need to count up each transaction from monthly reports?
The last time I checked I had to look at my monthly reports and count things up. It's a pain. But on the other hand, I can understand Paypal not wanting to put too much emphasis on it. Doing that might give some folks the idea to just stop using Paypal when they get near the reporting limit. Anyone in that group is likely trying to hide their income from reporting (not good), and it's not in Paypal's business interest to do anything that might encourage people to stop using their service. That said, it would be good to know just for the sake of evaluating your own business. And it's possible that there's an easier way to do this. I just haven't found it yet.
Do canceled payments on your paypal count against your 20,000 threshold?
That might depend on what you mean by cancelled. If it was cancelled before an actual payment was processed, I don't see how it could count. If you received the payment and it was reversed in a refund, it does still count. That's because they look at gross payments (before those adjustments) rather than net payments.
In this case, however, if you are reporting this as business income under the independent business section of your taxes (which is where I would report the 1099 income at this level), there is a section that allows you to report refunds and/or discounts given and that amount is then subtracted from the income. However, if ou are claiming any significant amount, you best have the documentation to back it up.
Will PayPal also report for previous years in which those conditions were met? Or will hte IRS want to look into previous years?
I know this article is years old, but I have to comment.
There seems to be so many people that don't understand business, and taxes, at all. It also sounds like a lot of people could be opening up themselves to audits.
Take for example the person who says they buy from Amazon & Walmart, and resell on eBay. If the first year that reporting was required, you all-of-a-sudden have $105,000 in income reported from Paypal, wouldn't you think the IRS might want to look & see if perhaps this source of income may have been unreported in the years prior?
If you are buying & selling on eBay, then you should have been filing all along. I agree it gets to a point where maybe having to hire an accountant makes it not so much fun. But anyone who is selling $20,000 & 200 transactions per year, is in a business.
This website is so helpful, but no one addressed my case.
My wife and I report 1040 as a married filing jointly. My wife has her own business and I do too. We of course have the different paypal accounts. The income from each of us doesn't meet the 20k/200 but combined amount does. Do we need to report it when filing 1040?
i am using jak