PayPal Tax Forms and Taxes: What You Need to Know

If you receive payments on PayPal, you may receive tax forms when you don’t need to pay taxes. You may also need to pay taxes when you don’t receive tax forms. Here’s how you can figure out what you need to do.

What tax forms do you get from PayPal?

If you receive more than $600 in payments from PayPal during a calendar year, you’ll get a Form 1099-K. Form 1099-K reports electronic payments.

If you’re an independent contractor performing services or are selling products in a business, you’ll need to report your income (and expenses) on Schedule C when you file your tax return. If you received personal payments not subject to taxes, don’t include them on your tax return — you can report less than what’s on your 1099-K if needed.

A common thing to watch out for is clients who report the same income on 1099-NEC. If they pay you through PayPal, they’re not supposed to issue a 1099-NEC. If they do, only enter the income once so you don’t pay double taxes.

What about international sellers?

PayPal generally doesn’t need to issue a 1099-K to international sellers who are outside of the United States and not receiving money in a U.S. bank account. PayPal requests a Form W8 BEN or W8 BEN-E from international sellers to verify their status.

If you are paying an international seller, you may need to withhold taxes and issue them a Form 1042 or Form 1042-S. Since the transaction isn’t reportable by PayPal, you may need to report it.

Do you file your 1099-K with your tax return?

Both 1099-K and 1099-NEC are for information only. You don’t file them or enter them on your tax return.

If your tax software asks you to enter them, it’s only to help calculate your income. You can either enter your 1099s or just skip this step and enter your total income under gross receipts.

How do sales taxes work on PayPal?

PayPal doesn’t issue sales tax forms, automatically collect sales taxes, or make sales tax payments to your state. PayPal does give you tools to set sales tax rates and generate reports showing the sales tax collected.

Sellers have to manually track the sales tax they collect and make payments to each state where they owe sales tax. This is an OK solution for sellers who only have to pay sales taxes to their home state.

Larger sellers will generally choose an eCommerce solution that automatically calculates their sales taxes. This saves the burden of tracking tax rates across different states and local areas. You can still use PayPal to collect payments, but PayPal will just show the total paid, and your other software will manage sales taxes.

When are PayPal payments are taxable?

Using PayPal is the same as getting cash. You can use PayPal for things that are taxable and things that aren’t taxable.

PayPal generally doesn’t know whether the money you receive is taxable. You might receive personal payments in a business account or business payments in a personal account.

The usual tax rules apply to PayPal payments depending on why you got paid.

  • Selling goods and services is generally taxable.
  • Selling collectibles is often taxable.
  • Having a garage sale (online or offline) to get rid of old junk is generally not taxable if you’re selling everything at a loss.
  • Someone paying you back money is generally not taxable.
  • Gifts are generally not taxable except for very large gifts over the gift tax limits.

If you don’t have a tax reporting obligation, you don’t need to include the money on your tax return even if you got a 1099-K. The IRS may send you a notice asking about the money, but as long as you can document what it was for, they won’t charge you additional taxes.

What if a payment type is marked wrong?

If you have a payment marked as goods and services when it shouldn’t be or not marked when it should be, it doesn’t change whether the payment is taxable. Go by what the money was actually for.

If you contact PayPal soon after the transaction, they may be able to correct it. If not, keep documentation showing what the payment was for in case the IRS questions you.

How do you track what your PayPal payments are for?

There are several ways you can track your PayPal payments.

  • PayPal lets you run reports by who paid you. This works if the people paying you only pay you for one reason (e.g., you don’t sell to a friend who also sends you personal payments).
  • You can (and usually should) create two PayPal accounts to split up your personal and business transactions.
  • You can use accounting software that categorizes your payments as business or personal and also adds business categories if needed.
  • PayPal lets you export all of your transactions in a spreadsheet that you can then organize.

Are PayPal fees tax deductible?

PayPal fees are generally tax deductible if the payment is taxable. They aren’t deductible for personal payments.

If you receive a payment for $1,000 in business sales, the fee is about $35. You will be able to withdraw $965 to your bank account.

  • Report the full $1,000 as income on your tax return.
  • Report the $35 fee as a payment processing fee expense.

To report your taxes properly, you’ll need to have your accounting software track your PayPal account or manually use your PayPal reports. If you go by your bank statements, you’ll only have the money after your fees.

If you

  • Report $965 on your tax return
  • Don’t claim the fee as an expense

It works out to the same amount of net profit and taxes. However, your gross income may be lower than the IRS is expecting and could get you audited.

Does PayPal withhold taxes?

PayPal generally doesn’t withhold taxes unless you’re subject to backup withholding. If you receive taxable income through PayPal, you’ll usually need to make estimated tax payments.

 

Disclaimer: This post is provided for general information only. The information may be outdated or may not fully cover the unique circumstances of your specific situation. Always consult with an appropriate professional before making important decisions.

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