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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It seems it would be best to keep personal and business transactions separate when using any payment processing service. The requirement to report via 1099 for every business and contractor will be a big burden to small business owners.
I agree, that's usually best. My concern with this though is that both personal and business accounts are combined for IRS reporting. That means non-taxable personal transactions (such as under gift reporting limits) would be reported as income. More importantly, it means double or even triple reporting is possible. For example, let's say I work with a U.S. client who pays me $5000 during the year. That client would submit a 1099 to report that income. Let's also say they pay through my Paypal business account, where I total more than $20,000 in a year and have over 200 total payment transactions. Paypal would also report that same $5000 as income (double-reported). Now let's say I also have a personal Paypal account, and $2500 of that is transferred to my personal account as payment from my business while the rest is left to cover business expenses. That $2500 will also be reported as income. That's triple-reporting. And frankly I think taxes are complicated enough as it is for independent professionals. I worry that not only will this make life more difficult come tax time for many Paypal users, but I can't help but think it's going to confuse even the IRS when they're auditing records.
wow. I'm really glad I don't live in the US. This all sounds impossibly complicated.
Thank you for this important info,,any ideas of how the IRS might adjust auditing procejures because of these issues??,,also how can a taxpayer prove the exclusion of some of the reported income as you mention??
The best thing to do is to talk to a licensed tax professional. They should be able to give you tips on what records to keep in these kinds of situations. Since it hasn't happened yet, no one can really speculate as to how it might affect audits and such, but I'd be surprised if similar things haven't happened in other cases with double-reporting. A tax professional would know more about the history, how things were handled, and be qualified to give you actual advice. I can provide general information and commentary about the news aspect of it, but I'm not a tax professional and therefore will not give actual advice on these kinds of matters.
Heylo guys, I currently reside in India and am not a citizen of Us. Will I need to report and pay Us taxes for services I charge for my clients who pay in dollars? Or would I have to report my earnings in India for income tax purposes only? I do not have a ssn, tin or ein.
Do let me know thanks.
These rules apply to those in the U.S. However, if you are in any position where you owe income taxes to the U.S. it might also apply to you. If you're not sure, you should consult with a qualified tax professional.
if I receive more than 20,000 in the year and have 200 transactions will paypal report to IRS even though I am not a citizen of US?
Thanks
If I have PayPal and also use Google's payment processing system and take in $19,000 from each for the year. Is that a possibility, or do they have ties that would prevent this workaround?
Good question above!
Looks like Larry from legitimate-home-business.com does not monitor this post, and that the information posted was to lure people to the legitimate-home-business.com website, to which I will not be visiting.
Imagine that.
Ok, so the info. was helpful, but to a very limited extent.
If you'd like less "limited" information, please review the official documentation linked above. This article was a summary and detailing of two potential concerns to online business owners. For full details, you'll need to get your information directly from the source, as that information can change over time. For example, it appears that now they clearly state personal payments won't count toward your total. So they appear to have finally addressed that issue, as previously they clearly stated personal payments would be included in the total.
OOPS! Larry is trying to lure people to his website by posting the website as part of his name. Jennifer Mattern is the individual who is no longer responding to comments. My mistake.
Actually I did reply earlier. The comment was just stuck in the queue so it didn't go live immediately [and since I don't see it in the system now I can only imagine it was flagged and deleted as spam]. Just for the record the information requested was already in the article where I noted that all payment processors are bound by the same requirements, and it's clarified in the official documentation the article linked to.
Hi, I talked with Paypal in March when I finally read this 'new' reporting system. I asked them if one had several paypal accounts, would they combine them and she said no because right now they only have a name to link together not a SS# or EIN, but after 2012 they might ask everyone for that information and then they could be linked. Does that sound right? Also, does this apply to charge card merchants or retail merchants? If I charge over $20K/year on it will they report it to IRS?
I'm actually getting out of the ebay business, I didn't make that much but it was over 20K and it's not worth having to do all the accounting, etc. If I need to make alittle extra I'll use craigslist.
I'd trust the documentation more than anything an individual says. And what they told you doesn't even make sense. That's because they will have an SS# or EIN for all accounts you have, and well before 2012. You were supposed to have given that already from what I understand -- since tracking starts this year and not next year (2012 is only when reporting starts to the IRS, and that's based on the info tracked in 2011). I noticed that they changed the documentation to say that personal payments wouldn't be lumped with business transactions, but I haven't seen anything saying they won't tie different accounts together. And unless you find something official in writing confirming it, I'd have to say you should take that feedback you received with a grain of salt since it seems contradictory to what's in writing.
Also, I'm not sure what you mean about it not being worth it to do all the accounting. You have to do all of the accounting and pay taxes even if it's less than $20k (legally). This is just a reporting requirement to make sure people aren't trying to skirt the law and get out of paying their taxes due. I'm hardly a fan of taxes and have made my own fair share of mistakes over the years, but I think it's completely reasonable for the IRS to make sure information is reported when so many people use services like Paypal to avoid a money trail through their traditional bank accounts. Using Craigslist won't change that in the slightest. You would still have to accept payments in some way, and you would still have to report that income.
This is baffling to me because i need help/advise. I just heard about it today because my cousin who uses my account just told me that paypal is asking for EIN. Apparently, she had known for a while but never thought she would be making more than $20,000 on the services she form for her clients. Three years ago, when he was still trying to make ends meet on Ebay, she ran into trouble when someone bought a merchandise and charged back on cc. She did all she could but her paypal account was not restored.