The fact is :
Yes, you have to report any income received (on your tax returns to the IRS) through PayPal.
If you ‘re using PayPal to collect income from retail customers, the situation is pretty straightforward .
Whatever receipts you have that are reported to the IRS by PayPal need to be included on your tax tax return .
The complication arises primarily for contractors and other minor businesses that receive payments from clients through PayPal .
In order for those clients to deduct payments made to you on their own tax returns, they must file an IRS form 1099-MISC .
But if you besides receive a 1099-K from PayPal, it creates the potential for duplicate report of income .
And that ‘s where taxes can get a little sting messy .
PayPal Reporting Rules
Under a jurisprudence passed in 2012, third-party requital services must report income received by taxpayers .
If you receive payments through PayPal you may or may not receive IRS form 1099-K ( the 1099 form designated specifically for third-party payment services ) .
According to PayPal ( and the IRS, Form 1099-K will be issued if you exceed both the follow thresholds in a calendar year :
- $20,000 in gross payment volume from sales of goods or services in a single calendar year, AND
- 200 payments for goods or services in the same year (except Vermont and Massachusetts, where the threshold is lower, irrespective of the number of transactions).
IRS Rules on PayPal Income
As a general rule :
Any income you receive you are required to report to the IRS on your income tax fall .
But many freelancer contractors and humble businesses receive some, most, or even all their income through PayPal. It is, after all, a payment service, and a very convenient one .
For that reason, it ‘s become a very common requital method, particularly for anyone who transacts business on the Internet .
But there are two complications with this arrangement .
1. Not all PayPal funds come from income
It ‘s identical possible that not all of the funds collected in your PayPal report represent income .
For example, payments are often received from family and friends. This is typically not income, but preferably a simple transportation of funds, possibly to settle an obligation, such as splitting a dinner yellow journalism .
2. Multiple Form 1099s
The bigger complicatedness, however, may affect freelancers and subcontractors .
Clients may besides issue IRS form 1099-MISC, which is the form the customer uses to report the income paid to the contractile organ. It besides provides a paper chase of the deductible expense for the node .
Form 1099-K issued by PayPal may very well include payments collected through the service from clients who besides issue their own 1099s .
For example, you may receive 1099s from five different clients reporting a full of $ 50,000 in payments. If all the payments are made through PayPal, PayPal may then issue form 1099-K, besides for $ 50,000 .
In this situation, the taxpayer will be looking at 1099s totaling $ 100,000, when in fact alone $ 50,000 in income was received .
The duplicate may be easily to prove if client 1099s match the PayPal 1099-K precisely. But if there is any dispute in the two amounts, it could cause the IRS to conclude you ‘ve under-reported your income .
What Does this Mean for Your Taxes
naturally, you only want to pay tax on the sum of income you ‘ve actually earned .
But with the hypothesis of PayPal issuing form 1099-K, the actual sum of income reported to the IRS may be higher than what you actually received during the course of the year .
If you are n’t able to successfully reconcile the difference in income, you could be liable for tax on extra sources .
For that reason, you ‘ll need to keep detailed records of your income, specially any received through PayPal. This will involve obtaining a print out of your PayPal acknowledge for the entire year. You will then need to identify requital sources .
For model, if Client A paid you $ 10,000 through PayPal during the year, you ‘ll have to identify those payments in the PayPal receipt criminal record. unfortunately, you ‘ll have to do that with every node who pays you through the service .
If you have detailed records matching PayPal receipts with customer issued 1099s, you ‘ll have the documentation needed if the IRS asks you to prove the income you ‘ve declared on your income tax return .
What if You Don’t Receive a 1099 from PayPal or Anyone Else?
There is a real possibility :
You wo n’t receive a 1099 from PayPal .
You may not even receive one from other parties, like clients .
however, if whatever funds you have received represent income, you ’ ll be required to report that information on your income tax hark back .
It ‘s crucial to remember that one of the major reasons the IRS audits income tax returns is because of income discrepancies .
That is :
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If there ‘s any evidence any that you may have received income, and it does n’t show up on your tax return, you may receive an IRS detect requesting farther information .
The fact that you do not receive a 1099 does not mean the income is not taxable.
For model, the IRS does not require a business to file a 1099 if the entire requital is less than $ 600, or if you as the payee are incorporated .
But evening apart from those two exceptions, there ‘s constantly the hypothesis of one or more clients plainly not filing a 1099 .
even if you do n’t receive a 1099, or if the income you earn from a node is less than $ 600, you ‘re still required to report the income on your tax return key .
Reporting 1099 Income and Non-1099 Income
Any income you receive through PayPal, whether or not it ‘s reported on form 1099, must be included on your tax rejoinder .
If you file as a lone practitioner, income will need to be reported on Schedule C .
If your business is run as a corporation, you ’ ll need to report the income on IRS form 1120 or 1120S .
And if you operate your occupation as a partnership, the income will need to be included on IRS kind 1065 .
even if you do n’t operate a formal business, you will still be required to report the income on Line 21, “ early Income ” on IRS Form 1040, Schedule 1 .
however, it will be to your advantage to report the income on Schedule C, so that you can deduct business expenses related to the production of that income .
Taking Deductions Against Your PayPal or 1099 Income
If you file Schedule C for the income you receive from PayPal and early sources, you can then deduct relate expenses .
You can do this careless of the total of income earned, or the expenses claimed .
For starters, you can deduct PayPal fees. These are considered like bank fees, and are separate of the action and expense of collecting income from clients and other sources .
PayPal fees typically range from about 3 % on domestic source income receipts, to well over 4 % on income received from external sources .
But you can besides deduct any other expenses related to the product of that income .
That can include :
- Use of your computer and/or cellphone.
- Rent or business use of your home.
- Supplies or inventory purchased in connection with your business.
- Purchase of necessary business equipment.
- Travel in connection with your business.
- Marketing and advertising costs.
- Internet or web hosting expenses.
- Other expenses necessary to the production of the income received.
It ‘s besides potential or even likely you have at least some business-related expenses paid through PayPal .
As discussed earlier, PayPal fees are one model. But if you paid any business-related expenses through the service, they will besides be deductible .
however, it ‘s crucial that you keep receipts related to those expenses. The elementary fact that they show up in your PayPal history does n’t make them deductible .
Written receipts from the merchants or service providers will be needed to document the occupation nature of expenses claimed .
Other Tips Related to PayPal Income
As you can see from the information above, it ‘s very important to keep detailed records .
That includes both income and expenses related to the production of that income .
unfortunately, income received through PayPal has a real electric potential to be confuse, or even duplicated .
If the IRS questions the income you ‘ve declared, accurate records will be your best defense. It besides makes preparation of your tax returns much easier .
Estimated quarterly tax payments
If you receive a meaning amount of tax income through PayPal, you may need to pay estimated quarterly tax payments .
These are due on :
- April 15th
- June 15th
- September 15th
- January 15th of the following year
You ‘ll need to pay a sufficient total of estimates to cover both the federal income tax on your business net income, equally well as the self-employment tax ( which is 15.3 % ) .
By making estimated tax payments during the course of the class, you ’ ll reduce the amount you owe when you file your income tax .
not only will that eliminate an unexpectedly big tax liability, but it will besides avoid the possibility of penalties and sake for deep tax payments .
There ‘s one other site that ‘s peculiarly singular to PayPal, and that ’ s hobby businesses. This is the type of business you engage in primarily for joy, and not profit. In fact, it may not be profitable at all .
however, even if it ‘s a hobby, you ‘ll need to report any income received from PayPal on your tax return .
If you fail to report it, the IRS can consider it to be under-reported income, and assess a tax on the income, plus penalties and interest .
By filing the income on your restitution, you will besides have an opportunity to write off expenses against that income. If your expenses exceed the income, then none of it will be taxable .
If you receive any income any from PayPal, it ‘s best to make sure you thoroughly document it.
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You should besides keep meticulous records of any expenses connected to that income .
Report both on your tax render, no matter how small the amounts are .
evening if that does n’t affect your tax indebtedness, it will keep you clear with the IRS .