If you receive a PayPal 1099-K, you need to be prepared for the possibility that a portion of your income might be double-reported to the IRS.
****Update: Check the following post for a more up-to-date discussion on 1099-K, and the requirements related to it.****
Last week, I received the new 1099-K form from PayPal. This wasn't overly surprising since I'd been expecting it. But it brought home an important point about this new form that the IRS expects: A lot of my income will be double-reported.
What is the PayPal 1099-K?
The IRS introduced the 1099-K a couple of years ago, but the tax year 2011 was the debut. The idea is that third-party payment processors (notably PayPal) are required to report income from transactions handled. The real targets are likely eBay sellers and others who make money each year with online auction sales or other types of sales and haven't been reporting their income.
Indeed, the IRS isn't going after the folks cleaning out their garages. A 1099-K is only issued if you have made $20,000 and had at least 200 transactions during the year. This is where a home business owner, especially a freelance contractor like myself, runs into problems.
Double Reporting Income to the IRS
Most of my payments are handled through PayPal. It's easy, and it ensures that I get paid. However, I fall into the requirements for reporting. So I get a PayPal 1099-K. Since I provide services to clients as an independent contractor, I'm getting another form: the 1099-MISC. For a home business owner, this can result in headaches galore.
My clients are sending 1099-MISC forms. Meanwhile, many of them have paid using PayPal. So PayPal is also reporting that income. Some of my income is double-reported to the IRS, so it looks like I am making more money than I actually am. This means an audit red flag could be raised because what I'm reporting as income isn't going to match what the IRS thinks I'm making due to the double reporting from the new PayPal 1099-K.
The result is that I will have to make sure I can match up which 1099-MISC forms come from people who pay me via PayPal. That way, if there is a problem, I can prove that I really haven't made as much money as the IRS thinks I have. It means extra work for me and my accountant this year (and probably in future years). Perhaps this situation can be resolved if I ask clients who pay by PayPal not to issue 1099-MISC forms. One of my bigger clients already decided not to issue the 1099-MISC, preferring to let PayPal do it. However, I don't know how that affects my clients and their efforts to report their expenses to the IRS.
Bottom Line: PayPal 1099-K
If you are a home business owner and have received the PayPal 1099-K, evaluate whether your income is being double-reported. Banks, PayPal, and other third-party payment processors must issue 1099-K forms. You need to be on your toes and know where all of your income comes from — and how your clients and customers pay you. Then, reconcile it all, and note what income is being double-reported.
What a pain! I already issued you a 1099-MISC for contract work you did for me, when I probably didn’t need to since I paid you via paypal. Wish I had known!
No worries. Pretty much everyone else has issued me a 1099-MISC. I think there is a lot of confusion about who is issuing what right now.
As a tax preparer/instructor, I can say that you, Peter, did the RIGHT thing. You must report on form 1099-MISC any payments to a contractor of $600 or more. You can be in violation of IRS rules and also be penalized for not issuing the form along with not being able to claim the expense of the payment. The correct tax preparation software can and should be able to work around this issue and help your client to NOT be double taxed. Check with a tax professional before ceasing to issue this vital document. More and more people are being required to issue 1099’s of various kinds as the IRS wants to stop under the table transactions. To bad the honest tax payer gets caught in the cross fire but with proper information you and stay safe.
*can*
Perfect example of how a ridiculous tax code does harm on so many levels!
There is likely not a perfect answer this year due to what you have pointed out. I would want to have the 1099-misc to show the IRS the source of true income. The EIN/SSN on the -MISC will be your best record if and when you are audited or questioned by the IRS.
Found a bit more information
http://www.irs.gov/businesses/article/0,,id=251489,00.html?portlet=104
“Trades or businesses should continue to report payments made to independent contractors on Form 1099-MISC as they have done in the past. No Form 1099-K should be issued”
That’s the issue now. My CLIENTS aren’t issuing 1099-K’s — nor should they. The problem is that third party payment processors are issuing the 1099-Ks. For independent contractors like myself, this creates a different situation. I’m not selling on eBay. PayPal is issuing a 1099-K because it has to as a third-party payment processor that facilitates most of my transactions. At the same time, my clients are issuing 1099-MISC forms. The result is that two different sources are reporting the SAME income. Which means that it looks like I made more than I did. Yes, it will be possible to cross-reference the payments. But it will require extra documentation on my part.
Curse you internet, I was agreeing with the problem you described, I was providing the likely best way to deal with it and to point out that the 1099-MISC is still required to be issued by your client(s). also
http://www.irs.gov/pub/irs-pdf/f1099k.pdf
Under current IRS code you as the payee are not required to put the information in any part of your return, it is currently for information only. This will likely change, of course.
I ran into this when I was doing some bookkeeping for a client and just turned it over to the CPA to decide if to issue. This is a confusing topic for sure. Shouldn’t Paypal help do our taxes anyway for taking a % of our money anyway?
On a side note,
The purpose for the 1099-K was to help close the gap in lost taxes.
However , it is aimed only at the little guys. For example, a person can have ten million dollars in sales within 150 transactions and have PayPal handle the processing and this person will not get a 1099-K
Seems a little one sided to me…
Hi! I am freelance designer and get paid from one of my clients via PayPal. I contacted them to find out why I still haven’t received a 1099-MISC from them yet. They told me PayPal will be issuing me one, but that doesn’t seem right? I didn’t work for PayPal. I did a search and found info about the new 1099-K, but I didn’t receive over $20,000 worth of payments from them or over 200 transactions last year. I completed over $12,000 worth of work for them in 2011. Shouldn’t they still issue me a 1099-MISC? Now I have no idea where to claim this income on my tax return and if I put that amount in “other sales/receipts” won’t that throw up a flag for the IRS? They are basically telling me they don’t have to issue a 1099 because they paid me through PayPal? What??
Hi Amanda. PayPal is issuing the 1099-K because it handled the transaction. Technically, your client should issue you a 1099-MISC. However, even if your client doesn’t, you are still supposed to report the income. If you are a sole proprietorship, the instructions for Schedule C indicate that you should report, for 2011, all your income, on line 1b. (The IRS ended up waiving the third party payment reporting, presumably to work out the issues associated with potential double-reporting.)
So, enter all your income on Schedule C. The only time that it’s a problem is if your total income ends up being less than what shows up on your 1099-MISC forms. If someone doesn’t send you a 1099-MISC, then the income you report will be more than what shows on your total 1099-MISC forms. And that shouldn’t be a problem. Just report all of you income on Schedule C, and fill out the form as normally.
You should be keeping your own records of what you earn, so you should be able to fill in the amount — even if everyone doesn’t send a 1099-MISC. A number of my clients don’t send me 1099-MISC forms. But it doesn’t matter because I use personal finance software to keep track of what I earn, and that’s what I use. I reconcile it with my 1099 forms, but I always end up reporting more income than is reported to me on my collective 1099 forms.
I also suggest that you consult a tax professional. I have an accountant do my taxes, since I am not a tax professional, and I might be wrong about some things.
I work as an independent contractor. One of my clients said their bookkeeper would be mailing me a 1099. After I failed to receive it, I emailed the bookkeeper directly last week. She informed me that my client had not issued a 1099 because of the change in the law and that PayPal would be issuing it to me instead. This was news to me, so I started looking online for more information. I am confused as to how this document is sent. Does it come in the mail, or do you download it from the PayPal site? When I checked my account under “tax documents” it said I didn’t have any. I earned approximately $15,000 from this client. Meeting with my tax lady next week and not sure what to do.
PayPal only issues the 1099-K if you have earned $20,000 total through PayPal. It should come in the mail. Also, the IRS isn’t requiring reporting of the 1099-K this year; it was a last minute decision. In any case, even if you don’t get a 1099 from anyone, you are still supposed to report the income. Your tax professional can help you out, but you’ll just report it as business income, even if you don’t have a 1099.
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This is happening to me now. The IRS contacted me about my 2014 taxes, saying that I hadn’t reported enough income and that I still owe more. And it turns out, it’s to do with the 1099-K and double reported income from people who paid via Paypal but also issued a 1099-MISC. The IRS told me I would have to get in contact with the people who issued the 1099-MISC forms and have them state, on their letterhead, that they paid me via Paypal, and how much, for that tax year. And then send that back along with the bill I got for money I don’t owe.
SUCH a mess, and I’m annoyed that the burden of this has to fall on the taxpayer, who has no control over who issues 1099-MISC forms to them.
And to make matters worse, I’m now having to brace myself for the ’15 and ’16 tax years, where this will likely happen again since I will also receive the 1099K from Paypal and 1099 MISC forms from people who paid me with Paypal.
That is awful. I agree that this is a huge burden because of the confusion surrounding the new policy. It will take time for people to “get” this and for it to work out through the system.
Great exmaple! Thank you