For nearly 20 years, PayPal has been the preferred payment option for buyers and sellers who wish to enact their business over the internet. And while recent apps like Venmo, Square, and Cashapp have all found themselves vying for supremacy of this space, PayPal has remained popular. This is due to both brand recognition and ease of use. PayPal’s credit card processing algorithm, is both fast and doesn't require the buyer to create an account.
Does PayPal report transactions to the IRS?
As much as we might prefer it, PayPal’s convenience does not allow for any sort of circumvention of the IRS. Like any application or service that deals in the exchange of currency for goods and services, PayPal is responsible for reporting all transactions to the IRS, although not everyone knows this.
What is PayPal telling the IRS about your transactions?
Much of the reporting requirements concerning PayPal transactions have to do with IRC Section 6050W, a relatively new piece of legislation that went into effect around 2014. This law states that PayPal will report details of your account directly to the IRS if you meet both of the following limits within a single calendar year:
- You received $20,000 in gross payment volume from sales of goods or services in a single year
- You received 200 payments for goods or services in the same year
Once both of those have been achieved, PayPal will send Form 1099-K to the IRS. You will also receive a copy of this form.
Does PayPal’s IRS reporting include transaction charges?
The figure provided by PayPal will only be a gross amount and will not include any shipping charges, transaction charges, or chargebacks. It will also exclude any personal payments received. No matter what, you will need to reconcile your own records so they match the figures stated on the provided 1099-K.
This can become tricky in terms of transaction charges, which can vary a lot based on the nature of the transactions themselves. There is a simple way to check these within your PayPal account. Simply go to History > Activity > View Account Statements and you will be able to weed out transaction payments for comparison.
What if I only use PayPal for banking?
The thing is, not all of the funds collected in your PayPal account represent direct income. Some payments—for example those you receive from family and friends for splitting a tab or mowing a lawn —are not technically considered income but rather a simple transfer of funds. However, even if you only log into PayPal to make withdrawals from your account with your physical bank, you should still familiarize yourself with PayPal's procedures in terms of tax liability.
If PayPal does not produce the 1099, do I still have to report Paypal to the IRS?
Yes, regardless of whether or not you meet the two thresholds of IRS reporting within IRC Section 6050W, you will still have to report any income received through PayPal. This is especially true if you are using PayPal to collect income from retail customers or for gig work. But rather than having PayPal generate the 1099 form, the responsibility will fall on you to account for all third party transactions on your account. You will need to include their receipts on your tax return as well