For tax year 2011 (and this still applies today), the IRS did something very interesting: they required payment settlement entities to file Form 1099-K for payment transactions. This includes PayPal accounts that received at least 200 transactions and $20,000 total during the calendar year.
If you’re a blogger, the majority of payments are made via Paypal, so this adds a completely new hassle to the income reporting equation. The two biggest problems are:
- Not everyone uses their PayPal account solely as a business account. For sole proprietorships, some payments from businesses should be marked as income. However, payments made from friends shouldn’t be. The IRS requirement doesn’t differentiate the different payments (unless they are made as personal payments). Therefore, in some cases, the 1099-K issued by PayPal may over-report income.
- This also raises the issue of being taxed twice on the same income. If someone pays me over $600, they are required to file a 1099-MISC. If they pay via PayPal, PayPal then records that payment on the 1099-K. We shouldn’t be required to pay taxes twice on the same income!
The 1099-K changes are designed to prevent tax evasion, which amounts to over $300 billion a year in the U.S. I like the idea of holding people responsible for their taxes, and this holds people accountable for their online business ventures which in the past may have gone under the radar. For example, eBay re-sellers are required to report their online income, but it’s been easy to avoid it in the past.
However, this puts a large burden on taxpayers. eBay sales of used goods will still show up on the 1099-K, even though they shouldn’t be considered taxable income (if you sell something for less than it’s worth, it’s generally not taxable).
Because this is so confusing, the IRS did something smart. Really smart. On December 6th, the IRS released the 2011 Instructions for Schedule C, the form to mark profit or loss from business, and in it they gave all business owners a little reprieve and helped us prepare for our future taxes as well.
First, while the 1099-K requirement still stands for 2011, the IRS has deferred the requirement to report the amounts on the 1099-K:
“However, for 2011, the IRS has deferred the requirement to report these amounts.”
What this means is that while you may get a 1099-K from PayPal, but in 2011, you did not have to record that number on your taxes. You are, of course, still responsible to pay taxes on your income that you received through PayPal, but you can do it the same way it’s been done in the past, by recording only the actual business income on line 1b. You can simply enter ‘0’ on line 1a.
Additionally, the 1099-K reporting requirement eliminates the need for some 1099-MISC filings, according to Don Frank, partner-in-charge of outsourcing with CliftonLaronAllen. The 1099-MISC indicates (in a not-so-straightforward way) that businesses should not complete Form 1099-MISC if the payment will already be reported on a 1099-K. So if someone pays you via PayPal and you will be issues a 1099-K, you won’t need to be issued a 1099-MISC as well. This avoids the double taxation issue.
Kudos to the IRS for realizing what a hassle this would be for 2011. I prepared for the future by separating my personal and business PayPal accounts and by tracking PayPal transactions separately so I won’t have to go through at the end of the year and figure out which transactions were included on the 1099-K and which need to be recorded on the schedule C separately.
Very interesting, good to know!
Good to know – Good thing I plan to keep things separate from here on out. That could have been a huge hassle.
This is exactly the type of scenario which exemplifies the preaching of separating business from personal activities. Not only will it become less of a hassle not having to go through all of the transactions, but it also saves on taxes since only true business income will be reported going forward. It really doesn’t take much additional effort or cost to have everything in separate accounts, but the time and money it saves can be well worth it down the road.
I’m way under this limit, so thankfully I dont have to worry about this!
@Jeff @ Sustainable Life Blog, You’ll get there in 2012, I’m starting to believe anyone can make a lot of money online!
@Daniel, Indeed!
I just read the detail on this last night. My business account is already separate from my personal account on PayPal so at least that’s easy for me. Last year I didn’t break 20k. Hopefully this year I can do it.
I’m so annoyed with this whole PayPal requirement from advertisers. Some of us don’t have accounts. What do we do then?
I want to accept your ads and I’ll take your checks made out to my business. Thank you very much.
@Sandy – yesiamcheap, interesting, how about google checkout? I’m sure someone would be willing to do it for a fee, like a friend who has an account who would be your middle man?
Since my PayPal account is linked to my Mint account, I simply categorize the deposits related to blogging income, etc, when I see them clear. I think my Mint account links directly to TurboTax, so hopefully it’ll be easy to determine what my gross receipts were for the year. I haven’t tried this yet, but I’m keeping my fingers crossed that it works out seamlessly.
@Shawanda @ You Have More Than You Think, One of the biggest problems involves refunds and other exceptions. They don’t remove the amount when you refund a transaction, so you have to mark it down somewhere or you’ll go crazy at the end of the year!
I only recently started recieving payments through paypal for my business, but I set it up with their own paypal account. I always keep my personal and business finances separate, and record any personal funds that I put into the business. That way there is no dispute.
Its harder and takes more work, but it makes tax time much easier to manage.
@James, yup, I’m starting to figure that out now, I’m glad they’re not requiring me to split it up for this year!
Very informative read. I don’t make anywhere near 20K, but I’m really just getting started. I think I might need to set up a business Paypal account soon, after reading this! Thanks for the heads up.
Daniel, great info! I hadn’t considered that a PayPal 1099 would overlap with transactions I’m already tracking! Hopefully my accountant would have figure that out, but I’m glad I know to look for it myself now too.
This is going to effect a lot of mystery shoppers who often get paid by paypal, but less then a 1099 would be issued for. Am I going to need separate accounts for each business?
Thanks for the info. It is good to know. I appreciate it. This is my first year as a business and having to claim things other than the normal “job” income. I am very lost.
Thanks for spreading the word on this important imformation. I’m yet to tally my income and expenses from blogging last year, I really hope I don’t trigger an audit by adding this to our tax filing.
This is very good to know. I was freaking out about the Paypal 1099K since we actually use our paypal account for many things. We show a huge amount of money coming in, but not all of it is ours. I think this is the first year I’m going to need the help of an accountant to do my taxes!
Great timing on this topic! I just started using paypal this past year for my blog.
If sales under $20,000/200 transactions are not supposed to receive a 1099-K then why did my $60/3 transactions for the sale of some person items get a 1099-K? Since I received this form, do I have to report the income? And if I do, where cuz it’s NOT business income. So frustrated.
Thank you,
Colleen