Some who use Paypal to receive freelance writing payments may have noticed them asking for your Tax ID number. That’s so they can meet the new the IRS rule that requires third party payment processors to send IRS notification if you receive more than $20,000 in gross payments and exceed 200 payments for goods or services in a calendar years. This goes for part-time and full-time freelancers who meet the minimum requirements.
If you’ve been paying taxes on all your income all along, this new 1099-K (see the draft) will just add more paperwork. For those who've neglected to report certain payments, it could be mean an unexpectedly high tax bill.
To fulfill Paypal’s request, you can provide your Social Security Number or EIN. If you use an EIN, Paypal will require you to upgrade to a Business account.
Potential Confusion
This new requirement might cause some confusion. If you have clients who pay via Paypal and send Form 1099-MISC because they’ve paid you more than $600, you could end up double reporting income. Not sure how the tax forms will compensate for this, but be aware that this could be a problem. The IRS says Form 1099-K is to “improve voluntary tax compliance,” so maybe they’re just using gross receipts on the form to match what you’ve listed on your tax return.
Because Form 1099-K will report gross sales without any adjustments, you’ll have to claim deductions for returns, fees, and chargebacks elsewhere on your Schedule C.
Simplify Your Paypal Account(s)
If you have just one Paypal account that you use for both personal and business transactions, this is a great time to separate the two. Create a personal Paypal account that’s linked to your personal checking account and leave business Paypal account linked to your business checking account.
Figuring out your taxes for 2011 may be a little messy if you’ve been using just one Paypal account. You can use Paypal’s reporting feature (History > Payments > Monthly Sales Report) to print a list of transactions for each month and note which ones were personal. e.g. gifts, money transfers, and other non-business payments. These personal transactions you would leave off your tax return. Once you receive your 1099s from clients, highlight the payments that are accounted for via 1099, so you’ll know what income gap to account for on your tax return. Your invoices should help confirm this number.
Final Notes
The new Form 1099-K isn’t limited to Paypal. All third-party credit card processors will send this form. Companies that are required to file Form 1099-K with the IRS are required to also notify the taxpayer either by mail or electronically.
The new rule only asks for credit card payments, so I’m assuming that eCheck and payments from a Paypal balance won’t be included. But, to be on the safe side, I’d suggest including all taxable payments in your tax return. An audit would reveal this income one way or another.
I want to disclaim that I am not a tax professional. If you have questions about what this means for your business, be sure to talk to your accountant, tax attorney, or tax preparer.
fun. thanks for the heads up.
Thanks for the head’s up on this. Why does it make me feel more tired just thinking of the paperwork? *sigh*
I’m glad the payments I do receive from Paypal aren’t that much, but you’re right about the 1099/Paypal nightmare. If you have a slew of client invoices and 1099s, that could be a royal pain to weed through.
Oh, this is going to be a nightmare. The clients who 1099 you and pay through PayPal, the clients who 1099 you and pay by check…
I have resisted hiring someone to sort through my mess at tax time forever – but I don’t think I have the energy for this one. Thanks for the warning!
I remember covering this on a client’s blog when the news came out .
https://www.dirjournal.com/blogs/paypal-to-report-user-earnings-to-the-irs-what-it-means-for-your-business/
When this was first announced, Paypal’s site said personal payments would also be included. Needless to say, that was a terrible though — counting things like gifts as business income. Fortunately they corrected themselves and that doesn’t look like it will be an issue anymore.
But the issue of double reporting still concerns me. My hope is that the IRS is ready to account for this and look at one or the other when it comes to 1099s rather than combining them. But we’ll see what happens I guess.
Another concern was whether or not this would affect international freelancers using Paypal. At first it looked like it would not. But even though they won’t have to have income reported, it may affect them. The latest info on Paypal’s site says that their non-US affiliates are required to comply (Paypal’s sites in other countries). So non-US users may have to now verify that status and their address in some way. I’d be curious to know if any outside the US have been asked to do this yet as a result of the changes. .
I haven’t played with it yet, but is there a report feature or even an indication that shows us if a payment was made using a PayPal balance or a credit card? eChecks are obvious enough since there’s a delay and they are marked.
That’s a good question. I just checked and all I see in transaction details is “instant” for the payment type. But I don’t see any way to tell if it’s from the client’s Paypal balance or a credit card. I never really thought about it before, as long as I’m paid on time. 😉 Just for curiosity’s sake though, I’d love to know if someone finds a way to track this.
Hi,
I am very new to this website. I want to say that everything looks very informative and well thought out. As far as paypal goes, the one thing that I’ve heard is that clients who pay with a credit card show up on your account as fees deducted. For example, say I get paid $50.00 for some articles. Two dollars of that $50 might get taken out for transfer fees. This, I heard, happens because the client used a credit card payment method.
You should be charged a fee for all business payments accepted — credit card payment or not. The only ways you wouldn’t be charged is if someone violated the TOS by calling a business payment a personal payment or if you receive a mass payment (where the client pays the fees).
Thanks for the info. That makes sense. I’m going to start keeping track of exactly how I’m paid.
I’m a new writer, and I’m wondering if I should be charging sales tax when I send a client an order? I’ve been sending invoices to clients on Paypal, and with Paypal taking off a few as it, it lowers my income a bit. A $25 payment will be about $23.90 something.
Sales tax would depend on your state. Unless you have a physical presence in another state, you don’t have to collect sales tax for them (although Congress is considering changing that in the future — but even then smaller sellers could be exempt, such as under $100k per year). And you never collect sales tax for your own state for customers in another state. For example, my state has a 6% sales tax. If I sold a product that was taxable to someone in my state, I would charge that tax. If I sold the same product to someone in another state, I would not charge that tax.
You would also need to figure out what’s taxable in your state. Writing services generally aren’t taxable. In my state, electronic products also aren’t taxable, so I don’t have to charge tax on e-book sales, even though I would if I wanted to sell physical books.
Not sure how much that helps. But the short answer is that you’ll need to check the sales tax policies in your state because they vary.