Paypal Changes You Should Know About
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. And this will be the case whether you’re an occasional seller or you are operating as a business; as long as you receive $600 or more via Paypal or similar platform, you will receive Form 1099-K.
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
For 2021 and prior years, Form 1099-K is not required unless transactions are 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 does not issue the consultant a 1099-K because it fails the more than 200 transactions in a calendar year requirement. In fact, this same consultant could have 10 clients, each paying $20,000 thru PayPal and would not receive a 1099-K.
With that being said, many entities that process credit card payments on behalf of 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.
Tax Implications
The Joint Committee on Taxation estimates that this change will increase tax revenue by $8 billion over the next 10 years.
Because of the current 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. Statistics show that 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. This means a 1099-K need not be filed when an individual uses PayPal or similar services to reimburse friends or relatives for expenses or to make charitable contributions. Same goes for payments of royalties or rents.
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