Stimulus Bill Requires Payment Processors (like Paypal) To Report Earnings of $600+ on 1099-K Tax Form

Update 12/20/21: Just a reminder that this goes into effect beginning January 1, 2022. Again, this is not a new tax and does not increase or decrease the amount of taxes you are required to pay by law. It’s just more forms and accounting hassle that will have to be dealt with. And of course, if there’s anyone who was underreporting their income it’ll get much harder for them to do so now.

We’ll likely have to wait until 2023 until we have more clarity on how Paypal and other companies are deciding which payments were for goods and services and which are rebates or other kinds of money transfers.

Related, I once wrote my non-professional thoughts on taxation as it relates to the little hobby of ours, see My Thoughts on Taxes for Miles, Points, and Cash Back.

Original Post:

A major under-reported facet of the massive $1.9 stimulus bill (round 3) is that it strengthens requirements on payment processors like Paypal to report on income received through their platforms:

Beginning on January 1, 2022, third party payment processors will have to report any income for goods or services exceeding $600 during the calendar year on a form 1099-K. Previously, processors only had to report this income if it was BOTH: (a) $20,000 or more during the calendar year, and (b) 200 transactions or more. This allowed most smaller stuff (like Topcashback, Ebates, PFS, Swagbucks payments) to go unreported.

(A few select states such as Illinois already have stricter laws requiring reporting at the $600 threshold, but most areas are currently governed by the federal requirements. Those are changing in 2022.)

This change concerns me for a few reasons:

  • I’m worried that companies may not always know what is ‘goods and services’ and what is not, leading to misclassifications. E.g. portal earnings are likely rebates and not considered ‘goods or services’, but I’m not confident that Paypal will classify that correctly (as has been the case in the past when even P2P payments were somehow included in the 1099).
  • Even if everything is correct and it’s income that I’m reporting anyway, it still adds a level of complication to everything, e.g. making sure the tax form is directed to the correct entity (personal or business), and having to burden your accountant with multiple small tax forms from a bunch of random companies.
  • It’ll also complicate things for an occasional seller, e.g. someone sells their old iPhone on eBay for $600 and gets hit with a 1099-K which they or their accountant will have to deal with, even though they don’t owe any taxes on the sale (it sold for less than they bought it for years earlier).

Whether or not you get a tax form does not change what you actually owe, e.g. if you don’t get a tax form you still have to report income earned, and if you do get a tax form you still only pay tax on the actual profits. The primary purpose of this stricter law seems to be for gig workers like Uber/Lyft drivers and the like, but it seems like the rest of us will get encumbered by this as well.

Important note: The 1099-K is just for total processed transactions, it’s not assumed to be your total profit; typically the profit on a sale is only a tiny percentage of the 1099-K reporting amount. Or it could be zero if you sold something for the same amount you bought it for. It does still create a hassle with the tax reporting. Fo example, you might have to report a business which earned zero, versus simply leaving it off your tax return entirely.

Interestingly, if you earn $500 from Topcashback and $500 from Ebates, and have them both paid via Paypal, then you’ll possibly  get a 1099-K from Paypal. But if you get paid from Topcashback and Ebates directly to your bank, then you should not get a tax form.

You can read the full stimulus bill at this link; section 9674 is what we are discussing in this post:

SEC. 9674. MODIFICATION OF EXCEPTIONS FOR REPORTING OF THIRD PARTY NETWORK TRANSACTIONS.

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gordda40
gordda40

So now here we are here at 2022. We sell a few items on eBay that are personal (not for profit) and eBay managed payments sends the payment directly to our bank account and takes their fees out before doing so. Nothing goes through Paypal any more on our end. If the buyer pays with Paypal, it does not show up that way to us. Will we see one of these 1099-Ks for the transactions I am describing?

Justin
Justin

Just exceeded $600 sales in eBay and they are withholding payment of the funds until the completed 1099-K is added to the account. Neat.

sam
sam

That must be why paypal isn’t worried. Yet another reason to withhold peoples’ money. I didn’t know they needed another one!

AllenW
AllenW

Anyone know if PayPal will include QR transactions. From time to time I receive payments and will stop using it if I have to taxes.

RiskandReward
RiskandReward

Has Paypal or Venmo provided any guidance to consumers about this? Given the potential complexity and confusion over this matter, people may decide to give up on using Paypal altogether to avoid the headache/drama of dealing with this. Or are they afraid of putting something in writing due to their screwed up accounting and reporting?

sam
sam

Why would they? Do they want to draw more attention to this so people do decide to move away from the service like I will with my piddly 1k? They are under no obligation to let consumers know. They also know what they are likely to do- put it all on the form and ask questions later. Why would a banker go “oh nevermind that SAR”? Of course they wouldn’t they’d go ahead and file it anyway because there’s only penalties for NOT doing it. Paypal etc are in the same situation. If they did want to do right and explain it then of course they’ll be accused of helping millions in taxes go unreported when people circumvent their processing methods to avoid detection…

Jack
Jack
RiskandReward
RiskandReward

Thanks for the link. This reads like a sh*tshow, as there can be no assurances that Paypal will file the correct amounts and the IRS may get up your ass because numbers don’t match with reality.

I wonder what gets counted when we use the 5% Paypal categories with Discover and Freedom? Is a $1500 amount going to show up mysteriously as a business transaction?

Andy
Andy

I assume it will, so I pay myself using two accounts under my own name, so it’ll be easier to explain there’s no business taking place if I do get a 1099.

Kafka
Kafka

I’ll be curious to see GAO’s math on how much this will cost to enforce vs the additional tax collected. Don’t get me wrong, I like people paying their fair share, I just don’t like spending $100 to save $99.

Jack
Jack

Most of the “matching” the IRS does is computerized, comparing the amount on the return to the forms filed by companies, but possible that a lot of mismatches will cause a backlog. I read that one of the bigger problems they were having were when people would get paid through PayPal and also get a 1099-MISC from the payer, resulting in double reporting.

Ssjjs
Ssjjs

Is zelle included ?

Arnold Rothstein
Arnold Rothstein

Pretty sure it is

midas89
midas89

Zelle is included, as are all similar services. As of this writing, however, if you send via Zelle via your bank’s Online Banking site, they still have not implemented a way to designate whether the payment is for goods or services or not. Venmo and PayPal have such a feature. When you get to the Pay screen using Venmo, there’s a button to activate that indicates if the payment is for goods or services. In PayPal, you can designate if it’s for friends or family or goods or services.

So, it is not yet known how Zelle will comply with the new reporting rule. Let’s hope they don’t just decide to 1099-K everyone where they leave it up to the receivers to sort it out on their tax return.

Misty
Misty

Is Apple Pay included too, as a 3rd party payment processor?

ceejayoz
ceejayoz

Shouldn’t. They’re not a payment processor at all.

P
P

Does this affect raise.com funds from selling gift cards?

Celia
Celia

How do they pay you? If it’s PayPal and it’s coded as goods and services, it’s possible. But until the forms start rolling in under this new threshold in January 2023, no one really knows. I think PayPal is going to see a lot less money going through in 2022 with all the uncertainty.

The one thing changing from 2011 is that the threshold is no longer 20K/200 transactions. Some states changed the threshold to much lower in the past year or two already. It seems that they’re trying to “catch” the influx of gig jobs (I pay my handyman cash). From my experience last year, as I am in Illinois where the threshold already changed, PayPal included everything on the 1099-K, from Raketun to Swagbucks to a friend passing me some cash they owed. However they issued me a corrected on in March that removed all of it. Curious what is going to show this year for me.

Misty
Misty

Wow, I thought a friend paying you money for something on PayPal or Venmo would clearly not be included under this–even if it was just a mistake.

Would it better to have friends use Apple Pay instead then to avoid the headache?

Celia
Celia

Like I said, they issued a corrected one, but no way to know what will show this year. I don’t think any payment that isn’t accompanied by a fee (ala Goods and Services) should be included. I guess those of us that got stuck with it early become the beta test 🙂

AllenW
AllenW

Was anyone of the transactions Made via QR? I hope they don’t include those

Misty
Misty

Another area to potentially change from PayPal as a payment source to a Virtual Visa etc, is the area of class action settlement payments. I usually don’t get a ton of money from one settlement, but it can add up over a year’s time.

Sam
Sam

That’s why starting two years ago I stopped all PayPal options on those. I’d even pick Amazon over it if need be.

Lee
Lee

I completely agree with Will’s assessment that this will get implemented poorly.

That said, the complaints in the comments that this is a tax on the poor is ridiculous. Person’s of various incomes cheat on their taxes. I’m guessing many of these same commenters also complain about people on government benefits, when this in fact a good way to help prevent their abuse. While abuse is lower than some media would lead you to believe, this is in fact a good way to reduce it. I.e. Higher taxable income = Lower government benefits.

Running a small business of any size is difficult. For those cheating on their taxes, they may reconsider whether their business is worth pursuing.*****

***** For every person that cheats on their taxes their are probably 3 people that shoot themselves in the foot for failing at the most basic record keeping. If you have $120,000 in sales and $80,000 in potential write-offs, basic record keeping could be the difference in paying tax on $40,000 or $120,000 in income. – If you can’t track your expenses, then you need to work a W-2 Job.

Slickdealer
Slickdealer

Wow, none of your comment made sense. Good job.

Curmudgeon
Curmudgeon

If I were still in the accounting / tax business, I’d say great! The more forms, the higher your tax prep bill.

For those planning on ignoring the form next year, you’ll be pleased to know that the IRS matches all the forms filed on you against your tax return. If there’s a mismatch, you get an automated letter, which of course you have no idea how to handle, so yay! more money for your tax guy. So, you’re better off reporting whatever garbage number is on the form, then zeroing it out for the transactions that shouldn’t have counted to the total.

p.s. I’m not _your_ tax guy so I’m not going to tell you how to do it since I don’t know your situation, but feel free to hit up your tax guy for advice, because he needs help with his car / boat / house payment too. 😀

midas89
midas89

You make it sound so easy when you say “report whatever garbage number on the form, then zeroing it out for the transactions that shouldn’t have counted to the total.”

You’ve seen Schedule C (which is where 1099-K income is to be reported). First of all, if one has to fill this out, they have to declare their “Principal Business or Profession” on the form. What if you’re doing personal transactions over $600 and are not a biz or it’s not related to any profession? I guess you could just put None or N/A.

Then you put the total of all 1099-K’s on Line 1. Then, it looks like Line 2 is the line to put in the total of the amount you feel you should not have been 1099-K’d.

Schedule C Form Excerpt:

Part I Income
1 Gross receipts or sales. . . . . . . . . . ▶ 1
2 Returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . 2
3 Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . 3
4 Cost of goods sold (from line 42) . . . . . . . . . . . . . . . . . . . . . . 4
5 Gross profit. Subtract line 4 from line 3 . . . . . . . . . . . . . . . . . . . . 5
6 Other income, including federal and state gasoline or fuel tax credit or refund (see instructions) . . . . 6
7 Gross income. Add lines 5 and 6 . . . . . . . . . . . . . . . . . . . . . ▶

Curmudgeon
Curmudgeon

It is easy. Give the paperwork to your tax guy. Write him a check. Done. 🙂

midas89
midas89

Ha. No, no, no. I will pay my tax guy ( or tax gal) via Venmo and mark it as a good or service. 🙂

calwatch

I get 1099-NECs all the time. They flow to Schedule C. Then deduct your expenses off it. Problem solved.