Paypal is a popular online payment service that is widely used among both businesses and individual consumers. So much so that more than 337 million merchants and regular users use PayPal daily. Over 15 billion transactions were completed in 2020 alone, totaling $936 billion in transaction volume.
With so many users out there, a question arose: Does PayPal report to the IRS?
PayPal reports to the IRS automatically if you surpass a set threshold. The latest threshold is $600 per year, and those who surpass this amount will receive a 1099-K form which they have to fill out. Not all transactions will prompt an automatic report, though, as gifts, donations, and other infrequent incomes are not taxable.
So, When Does PayPal Report to the IRS?
If you’re providing goods or services and receive money for it and you surpass the threshold, PayPal will immediately notify the IRS. This means you will get a 1099-K form when it’s due, and you will have to file it.
The threshold for 2022 is all income surpassing $600 cumulatively, regardless of the number of transactions.
Does This Only Affect PayPal?
This new IRS policy affects ALL third-party payment network providers. It doesn’t matter which one you use – if you surpass the $600 threshold, you will have to report it. This includes Venmo and CashApp too.
Only time will tell whether this threshold change is enough to make people switch their third-party payment network providers, including PayPal.
What Is a 1099-K Form?
A 1099-K is an IRS form that’s used to report all the income you’ve received from Credit Card payments, debit cards, or even stored-value cards, and/or any of the third-party network transactions. IRS says that this form is used to improve voluntary tax compliance. However, if you receive payments (totaling more than $600) on Venmo, PayPal, or any of the other third-party network transactions, you will automatically get a 1099-K Form.
Why Haven’t I Received a 1099-K Form Before?
The answer is straightforward – you probably didn’t surpass the threshold to get it because it was set at $20,000 AND more than 200 transactions. But, the threshold amount changed for 2022, decreasing dramatically.
Now, if you get more than $600 in any number of transactions (could be one large one or hundreds of small ones), you will surpass the threshold, and it will get automatically reported to the IRS. As a consequence, you will get a 1099-K form.
When Do I Have to File a 1099-K Form?
Since this threshold change affects the year 2022 alone, you will probably get your forms in January of 2023. It is possible that, due to the increased number of people getting the form due to the threshold change, there could be some delays.
What Are Taxable and Nontaxable Income?
There are a lot of categories of income – some fall under the taxable, while others fall under the non-taxable ones. What if, for example, you have a garage sale and receive money through PayPal for an old item? Believe it or not, there’s a rule for that too.
If you sell goods or services and surpass the threshold, that is a reportable income. If you sell things that are deprecated in value, it’s not observed as income.
If you bought something for $1,000 and sold it later for $650, that isn’t viewed as income or a sale of goods or services.
Before we go over some taxables and non-taxables in greater detail, here’s a table of all of them for future reference:
|Taxable Income Items||Non-Taxable Income Items|
Salary, Wages, Bonuses
|FRINGE BENEFITS |
Life insuranceHealth insuranceTravelLodgings Meals
Federal bond interest
Corporate bond interest
Industrial development bond interest
Installment bond interest
US possession bond interestMunicipal bond interestSeries EE savings bond interest
|DIVIDEND INCOME||ROTH IRA INCOME|
|DIVORCE PAYMENTS Alimony (before 12/31/2018)||DIVORCE PAYMENTS Alimony (after 12/31/2018)Child supportProperty settlements|
Capital gains Ordinary gains
|GIFTS & INHERITANCES|
|TRADITIONAL IRA INCOME||WORKERS’ COMPENSATION|
|PRIZES & AWARDS|
What Income is Excluded From 1099-K?
We’ve covered that selling deprecated stuff (things that in time have lost value) don’t have to be reported as income to the IRS, but are there any other instances? Yes, there are.
- Gifts and Reimbursements – Receiving money as a gift or as a reimbursement of sorts doesn’t fall under the taxable income. However, the gift giver may be taxed.
- Political Donations – If you donate or receive money as a political donation, that isn’t considered a taxable income.
- Charity Gifts – Giving away money to a charity is excluded from the taxable income, and it’s also tax-deductible.
- Tuition – Receiving reimbursement for tuition isn’t taxable income. Yay!
- Medical Expenses Paid on Someone Else’s Behalf – If somebody pays your medical bill, you or they won’t be getting a 1099-K form.
Attention! Cash/Gift Cards From Employers are Taxable
If you receive cash or gift cards from an employer, that income is taxable since it’s treated as a fringe benefit. If you receive a gift of modest value from an employer for a special occasion or infrequently, that is considered a de minimis benefit and is not taxable. De minimis benefits could be:
- Money for meals,
- Money for transportation.
For example, if you’re working overtime, it has to be documented, but if you get reimbursed for a transportation expense because of it, that sum won’t be taxable. That sum will be taxable if you receive money for meals every month.
Also, cash can NEVER be a de minimis fringe benefit. The IRS claims that items with a value exceeding $100 could not be considered a de minimis benefit.
Make Sure the Transaction Labels Are Correct
If you are receiving money through PayPal that is not intended for the goods or services you provided, make sure that the transaction is labeled correctly. If your friends mark it as a payment for goods or services, that will be considered a taxable transaction.
Figure Out How The Reporting Changes Will Affect Your Business
Due to the new income threshold changes set by the new IRS policies, PayPal and other money apps are bound to send reports automatically if the threshold is surpassed. The new threshold is decreased from $20,000 per year to $600 per year – in gross payments volume.
This change is likely due to the increase in online sales and will impact many small businesses, gig economy providers, and individuals who offer goods and services.
If you use PayPal to process payments, it is important to understand these changes and how they may affect your business.