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 Bargaineering 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.

19 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.

  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.

    • 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!

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