3 Things Your Home Business Should Know about the PayPal 1099-K

Are you getting a PayPal 1099-K? Be prepared. It may mean extra paperwork for you.

I hope you keep detailed records as a home business owner, because if you are issued a PayPal 1099-K, you’ll need them. It’s true that you should have good records regardless, but the 1099-K is likely to cause headaches you didn’t expect.

PayPal 1099-K

What is the 1099-K?

For the most part, people are associating the 1099-K with PayPal. However, other third-party payment processors, including the banks that process debit and credit transactions for your home business, might need to issue you a 1099-K. As a third-party payment processor, PayPal is subject to issuing the 1099-K.

The 1099-K is meant to ensure that those that do business online report their income. Third-party payment processors issue this form when you have at least $20,000 in transactions and 200 transactions. The issuer sends a copy to the IRS, and a copy to you, for your records. Just like the 1099-MISC, the IRS gets a copy and you get a copy. So it’s not exactly a PayPal 1099-K, but it is a form that many people are going to receive as a result of carrying on business through PayPal. I will be receiving one — just as I received a 1099-K last year.

Originally, businesses were going to be required to submit a reconciliation if their income didn’t match the amount shown on the 1099-K. However, recognizing the burden that would place on many small and home business owners, that requirement has been done away with. But that doesn’t mean that you’re in the clear.

3 Things You Should Know about the 1099-K

As you prepare your home business taxes for the year, here are 3 things you should know:

  1. Some of your income might be double-reported: There is a possibility that your income might be double-reported. This is an issue for me. At the same time, PayPal is sending out a 1099-K to the government, reporting the payments I received, my clients — most of whom pay through PayPal — are sending 1099-MISC forms to the IRS. So some of my income is reported twice, and it looks like I made more than I did. As a result, I am keeping careful track of which income is double-reported. Just in case.
  2. Your chargebacks and fees won’t be reported: The 1099-K only reports your income from the third-party transactions. So, if there is a chargeback on a credit card transaction, or if you have had fees deducted from your PayPal income, that doesn’t show up on your 1099-K. You will need to have records documenting these costs so that if you are audited, you have the proof you need to back up your claim that you paid all of what you owe.
  3. You should be prepared to reconcile your income with the 1099-K: Even though the requirement to submit a reconciliation to your 1099-K with your tax return has been waived, you should still be prepared. If there is a big enough discrepancy, you might be flagged for a tax audit. If this is the case, you will want all of the records available to you, showing allowances, expenses, and fees, as well as copies of the 1099-MISC forms you have that overlap with the 1099-K form that you have.

Some of my clients aren’t issuing 1099-MISC forms to me, due to the fact that they assume the PayPal 1099-K will take care of it. According to the instructions for the 1099-MISC, you are supposed to leave out payments handled by third-parties. Additionally, Intuit, in its QuickBooks Support, indicates that businesses don’t have to include payments made through PayPal or with credit card, on 1099-MISC reports. (Hat tips for links from Jim at Wallet Hacks and Glen at Free From Broke.) However, there has been a lot of confusion on this point, so, as a contractor, you still might end up with double-reported income if your clients don’t realize the change.

Before you make changes to issuing a 1099-MISC, check with your home business accountant or a trusted tax professional. Find more information about the 1099-K at the IRS web site.


Written by Miranda Marquit

Miranda Marquit is a freelance writer and professional blogger, specializing in personal finance, small business, and investing topics. She writes for a number of financial web sites and blogs, and has been featured in numerous media. Read about life as a freelancer at MirandaMarquit.com and in her book Confessions of a Professional Blogger.

38 Responses to 3 Things Your Home Business Should Know about the PayPal 1099-K

  1. Great post Miranda. Thank you for explaining this so clearly.
    I’m a CPA and I didn’t realize that Paypal was sending the 1099-Ks to the recipient. Does the payor get a copy too?
    Most people I pay do not cross the 1099-K thresholds, so seems like they should still get a 1099MISC from me.

    • To back up Christina’s comment, the following is an exert from the 2015 1099-Misc instructions.

      “Form 1099-K. Payments made with a credit card or
      payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC.
      See the separate Instructions for Form 1099-K.”

      So if your handling the accounting for a business that uses some individual contractors that are not incorporated, you show try to minimize paying them by check,and instead pay them with a credit card or use a 3rd party processor like Paypal. That would cut down on the number of 1099s you would have to process at the end of the year. Nobody likes to process 1099s; it’s just another administrative annoyance that you have to deal with. Some contractors may balk at using Paypal. Just tell them too bad. Offer to pay whatever transaction fees the payment processor charges.

  2. how I will get my PayPal 1099-k ? on the mail box or I will have to download it from PayPal website ?
    because PayPal shows that i don’t have tax reports for 2014 !, i don’t know ! it might be early for now, its Jan 23 i got nothing.
    please advice, thanks

    • My 1099-K is something I just download on PayPal’s web site. It should be available by January 31. If you haven’t received anything by the third week in February, contact PayPal. Also, realize that you won’t receive a 1099-K unless you have done $20,000 in business, and have at least 200 transactions.

      • thanks Miranda for your replay
        I can see my 1099-k in paypal website now, but I didn’t get it on the mail yet, its Jan 27.

        I’m still not sure what should I do with it ! the numbers on 1099-k matches my calculations.

        still don’t know what’s the point, my be just to check if my numbers are right.

  3. So confusing! I do a lot of work through Elance. They issue me 1099’s for the clients I worked for through their platform during the year. When I receive the payments into my Elance account, I can then transfer funds to Paypal or my bank account. Sometimes they go to Paypal, sometimes to my checking account, sometimes split between the two.

    Paypal records these transfers of funds from Elance as a payment for service, so they report it on the 1099-k in addition to it being on Elance’s 1099 Misc.

  4. i didn’t pass the $20K/200 threshold.
    how would i report my ebay income. what form?
    also i didn’t make a profit,i actually had a loss.
    thanks

    • If you are a sole proprietor, then you probably need to report your profit and loss on Schedule C. You should also check with a tax professional to make sure that your efforts are considered a business, and not a hobby.

      • I received a 1099K from paypal for tax year 2013 in early 2014. I did not meet the number of transactions or the dollar threshold. I called paypal and they told me it was sent to me in error and would not be sent to the IRS. I just let it lie at that point. I just received a letter from the IRS that adds the paypal funds (yes, paypal did send it to IRS) to my regular income and requires additional payment for this “income”. I’ve talked to paypal 3 times now and they promised to send a corrected 1099K (7 days now with no receipt). My plan is to send the corrected 1099K with an explanation that the sales were from internet type garage sales. Do you see any other way to correct this? I am very angry with paypal due to their erroneous issuing, bad advice and now the circus I am facing to get the corrected copy. I wonder if there is any legal action I can take due to this?

        • I would consult with a tax attorney at this point. That’s a tough situation to be in. Although, technically, even if PayPal didn’t report, the IRS would expect you to report all of your income, whether or not you receive a 1099.

      • If it is a hobby and there is no profit or money transferred to your bank or anything but there are a significant amount of transactions and money being moved (around 200 transactions but $15,000 so under the 1099 threshold) then would you have to report it in your taxes?

  5. i wasn’t aware that i will get a 1099-k now i have to pay taxes for this income,
    what deductions i can put and how does it goes with the capital i put in?
    do i have to pay tax for the amount that is on my 1099-k or for just the profit ?

    • Technically, you are supposed to pay taxes on all your income. Regular business deductions can be used to reduce your income. Depending on your business organization, a profit and loss statement, or listing everything on your Schedule C, can help you show which expenses can reduce your income. You should contact an accountant or a tax professional for help figuring out what you are eligible for.

  6. They need to inform businesses better about the 1099-K. I was stressing about potentially having to face a huge amount of paperwork to pay 50+ anthology authors small amounts.

    This makes things 1000 times simpler for them and for me. If I hadn’t stumbled onto a similar article, I would have never have known. This information isn’t obvious on the IRS website, and they’ve stopped answering business questions on the help line that aren’t employment related!!

    • You shouldn’t, since the guidance is $15,000 AND 200 transactions. But you might still get one. And even if you don’t, remember that the IRS still expects you to report that income.

    • You shouldn’t, since the guidance is $20,000 AND 200 transactions. But that doesn’t mean that PayPal may decide to send you something anyway. Even if you don’t get a 1099-K, though, remember that the IRS still expects you to report that income.

  7. Well be prepared I got a letter from the IRS in March about my 2013 reporting. Multiple things were double reported due to the 1099k and the 1099misc I received. I requested corrected 1099 from several people and they refused to provide this. I sent all of my income information as well as the refusal emails. The IRS is now charging me penalties and stating they will only change it if I get PayPal to adjust their 1099k. I am going to try to call PayPal tomorrow not sure how much success I will have. I feel like I am being harassed by the IRS. Good luck getting one on the phone from the IRS!

    • Same here Christina- I had double reporting and have been trying to get my 2013 taxes resolved since last October. Added overdue penalties and interest too!!!!!

  8. Let me see if I understand this correctly, $20,000 & 200 transactions a 1099k will go to me as well as the IRS? If I stay under that amount and still receive a 1099k does this means PP send one to the IRS?
    Another question, I totaled all money received by PP and have $19000, is this what PP goes by “money received” ? or are there other calculations PP uses to come up with a $ amount?
    Thank for answering my questions
    Gilbert

    • If you receive a 1099k, assume that a copy went to the IRS as well. The guidelines say that a 1099k HAS to be submitted if you have $20,000 + 200 transactions, but that doesn’t mean that something won’t be sent along with less. That’s the requirement, but there are always overachievers in the world. If you receive something, assume a copy has been sent to the IRS as well.

  9. Regarding the 200 transactions, does it only apply to 200 transactions where payment was received? I paid multiple vendors which would put me well over 200, but as for received payments, I am well under the 200 threshold. Should I still expect to get a 1099k?

    • Unfortunately, I’m not sure. Consult with a tax professional on that. All I can see when I check into is just the “200 transactions and $20,000 in income” guidance. As with so many of these, it’s open to interpretation. But keep your eyes peeled for it, just in case. You should have what you’re getting by the middle of February.

  10. Hi there. Thanks for writing this article.
    Paypal reported my taxes for 2013 that were already reported by the company who pays me. Therefore I was double taxed by the IRS, and the IRS is stating that I owe money that I don’t in fact owe. Above you said Some of your income might be double-reported. What do you do if this happens?

    • You’ll have to reconcile your 1099-K with the applicable 1099-MISC forms. That means cross-referencing everything, perhaps in a spreadsheet. You’ll have to show your cross-referenced information to the IRS.

      • I sent them copies of everything including a spreadsheet. Guess what, NOTHING happened except them continuing to threaten me. I ended up paying (aka being extorted by the IRS) as they sent an additional letter basically stating with interest the amount owed would start doubling every 3 months. I did refuse to sign their document though.

        • Christina, I went into my paypal and just filtered out the 2 companies that had reported my income as well as paypal. I printed it out ( a sheet of paper for each) and sent it back to the IRS. That should prove to them that that payment went through PP.

  11. I received a 1099-k from PayPal but didnt meet the $20,000 in gross income requirement. I didn’t make a profit as to my expenses exceeded my income. How do I go about reporting my expenses? I don’t see a place other than the NOL, is that the only place? And isnt the NOL only good for seeing it on next years return?

    • Depending on how you file your taxes, you can list your expenses on a Schedule C, or have them listed as part of your P&L. This way, you can offset the income listed from your 1099-K with your expenses. Consider consulting a tax professional or accountant for more information on how you can show that your expenses exceeded your income to result in a loss.

  12. If I have a contractor that is well below the threshold for 1099-K but is also below the $600 threshold for a 1099-MISC should I report the entire income on a 1099-MISC? Otherwise, the wouldn’t receive a 1099 at all.

  13. Hi Mirada,
    Thank you for your write up!
    Wondering If you could advise me in anyway!! I was sent a 1099 from Square for $37,000.00. I run a gallery and only take 30% off each sale the rest goes to the artist. So really I only made 30% of $37,000. Do I have to now 1099 each of my artists stating how much they sold their art for and how much I got? I need to show proof that I didn’t make all that money:(

    • It depends on how you paid the artists. If you pay by check directly, you probably need to issue the 1099s. If you sent the money through a third party like PayPal or Square, you probably don’t need to issue 1099s. However, you do need to list who you send money to and how much it was so that you can deduct it as a business expense against your income. Check with a tax professional if you have any questions about how to properly conduct the money you sent onto the artists. You’ll want to deduct that is reported income.

  14. Great article Miranda. I didn’t even know that this income had to be reported. I do my taxes online using TaxAct and everything went smooth the last two years. However I just received a $19,000 tax bill for the Paypal Money that I received from 2014. I assume I will also have to create one for 2015. How do I adjust for the past year with a schedule C so I can drop my taxes due? Can I still amend a 2014 and 2015 tax filing that has already been completed? Thanks for your help!

    • The IRS expects you to report ALL income that you make. You can amend your returns up to three years back, so you should be able to amend 2014 and 2015. If I were you, I’d get an accountant to help me. Actually, I use an accountant every year anyway. But whenever I have questions, I definitely turn to my accountant.

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