Important Paypal Changes
Important Paypal Changes
If you’re selling stuff online and using payment processing services, like PayPal or eBay, to collect money, get ready for upcoming changes. The IRS now wants to know if your Paypal or Ebay sales exceed $600 a year.
Starting 2022, the federal threshold for issuing 1099-K will drop to $600 with no minimum transaction level, due to a provision in the recently enacted American Rescue Plan Act. This means that in early 2023, you could receive Form 1099-K for 2022 online sales you make via Paypal, Ebay or similar platform. Form 1099-K is given to anyone who receives $600 or more via Paypal, including occasional sellers.
What is Form 1099-K
Form 1099-K is a tax form that is issued by third party networks or credit/debit card processing companies. It is used to report amounts you receive during the year from your merchant account, Paypal, Ebay, etc.
1099-K Reporting Before Changes
Prior to 2022, Form 1099-K was not required unless transactions were above the following thresholds:
- $20,000 worth of payments processed via one single processor during the year, and
- 200 individual payments processed via one single processor during the year
Example. You hired a consultant to help with your business planning and paid him $50,000 via PayPal. PayPal wouldn’t issue the consultant a 1099-K because it falls beneath the 200 transactions per year threshold. In fact, this same consultant could have 10 clients, each paying $20,000 thru PayPal and would not receive a 1099-K. Conversely, many entities that process credit card payments for their customers will issue a 1099-K regardless of thresholds.
How Things are Changing
Under a provision in the American Rescue Plan Act of 2021, also known as the COVID-19 Stimulus Package, individuals and businesses on certain online platforms who process more than $600 will now receive a 1099-K regardless of how many individual transactions or payments are processed during the calendar year.
It’s estimated that this change will increase tax revenue by $8 billion over the next 10 years.
Due to the high thresholds applied to the 1099-K issuance, even gig workers and online sellers who have a clear profit motive may not have received the form. That means that there is a high probability that those funds were not reported on the tax returns. And the IRS has no way of knowing that income is under-reported because Form 1099-K is not issued. Statistically, individual taxpayers fail to report about 55% of income from sources for which there is no information reporting. In contrast, only 5% of income listed on a 1099 goes unreported.
It is worth noting that the Congress also amended the tax code to make clear that third-party network transactions requiring 1099-K include only transactions for goods and services. Therefore a 1099-K need isn’t necessary when PayPal is used to reimburse friends or relatives or to make charitable contributions. Same goes for payments of royalties or rents.
If you are interested to learn more about ways you can increase your tax deductions and lower your tax, schedule a free consultation.