PayPal is one of many payment options and services used by small business owners. How does this play out for these business owners when it comes to filing taxes and dealing with the illusive IRS Form 1099-K?
PayPal may be an easy way to pay and get paid, but…
One of the first things a small business owner wants to know is whether or not PayPal will be reporting to the IRS. The answer is YES. In fact, confusion with this issue, especially by less sophisticated entities than PayPal, has generated multiple reportings to the IRS for the same transaction. Rationale is that it’s better to submit than to fail to submit.
What is the Form 1099-K?
This is a Payment Card and Third Party Network Transactions information return used to report certain payment transactions to improve voluntary tax compliance. This form should be received by January 31st if, in the prior calendar year, you received payments.
How does PayPal report sales to the IRS?
PayPal tracks the payment volume of your business accounts to check whether your payment volume exceeds both of these levels in a given calendar year:
- $20,000 in gross payment from sales of goods or services, and
- 200 payments for goods or services in that same year
If you cross the IRS thresholds in a given year, PayPal will send Form 1099K to you and the IRS for that year. This is one reason PayPal may have, or will, request that you provide your tax ID number, such as your Social Security Number (SSN) or Employer Identification Number (EIN), to your existing accounts.
What does the Form 1099-K actually report?
A Form 1099-K includes the gross amount of all reportable payment transactions. You should receive a Form 1099-K from each payment settlement entity from which you received payments in settlement of reportable payment transactions. A reportable payment transaction is defined as a payment card transaction or a third party network transaction.
What exactly is a payment card transaction?
- Any transaction in which a payment card, or any account number or other identifying data associated with a payment card, is accepted as payment.
- Third party network transaction means any transaction that is settled through a third party payment network. Again, this is only after the total amount of such transactions exceeds $20,000 and the aggregate number of such transactions exceeds 200.
Remember, and keep this in mind when figuring your gross payment: The gross amount of a reportable payment does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts. The dollar amount of each transaction is determined on the date of the transaction.
PayPal seemed so simple and friendly. What changed?
Nothing actually changed. Everybody got what they wanted, an EZ Button to make the purchase simple. Now comes the reality and some questions for the business owner:
- What do I do with this information?
- Why do I have duplicates?
- The gross amount of payment card/third party network transactions is incorrect.
- The Merchant Category Code (MCC) is incorrect. What, if any, difference does that make?
- How do I make corrections–and get copies?
So what else can happen?
There are always variables and weak links in any chain. Often the business owner feels confident using an on-line DIY tax program or a pop-up or seasonal tax shop. But what happens when things really get tangled up and you’re dealing with PayPal questions that mingle with issues such as :
- some of your 1099-Ks show your Social Security and some refer to your TIN;
- you shared your credit card terminal with another person or business;
- you bought or sold your business during the year;
- you changed your business structure;
- you allowed customers to receive cash back
What’s the bottom line?
There really isn’t an EZ Button, but most people want things to be as easy as possible. Just like you work hard to take good care of your customers, we work hard to take care of our clients. The bottom line? Do the things you do best–whether it’s owning and running the best coffee shop, beauty shop, law firm or pharmacy. Whatever you do, it’s up to you to make day-to-day and long range decisions to keep your business running smoothly.
As your CPA, or your future CPA, I hope we’ve brought up some questions that raised your eyebrows. We know these answers and we can help you. That’s just part of what we do.
Give us a call. 479-478-6831.