Taxes on Using Ebay and Paypal
Paypal and other payment processors have to report information about those who receive payments to the Internal Revenue Service (IRS), when sellers or service providers receive more than $20,000 in gross payments and receive more than 200 separate payments in a calendar year. Payment processors will send Form 1099-K to those sellers and service providers who reach both of these levels. Payment processors will also provide the information to certain state tax authorities as required by the states. This law has been around for years (IRC Code Section 6050W), but many taxpayers are only now discovering the consequences. Furthermore, Form 1099-K must be filed for payments received from debit and credit card transactions without regard to whether or not the thresholds of $20,000 and 200 transactions are met.
Those sellers or service providers who receive a Form 1099-K will need to report it as business revenue on their tax return--just like any other miscellaneous revenue (likely on Schedule C of their Form 1040 tax return). This law has a big impact on eBay as it relies significantly on PayPal. This rule applies to any bank or payment processing company that settles credit cards, debit cards, and electronic payments will have to issue information returns informing the IRS of what sellers and services providers receive. Payment processors will include shipping charges and sales tax in the total amount reported on Form 1099-K. Transactions will be reported based upon when they are processed. Further, even non-profit organizations will receive Form 1099-Ks in the same manner as companies organized for profit. Companies that have a Employer Identification Number should upgrade to a business account and provide the number to PayPal or the payment processor. Those sellers or service providers with Personal account will be have to provide a social security number. Taxpayers should retain documents and records substantiating their expenses and costs related to their income earned from transactions to which they have received 1099-Ks.
1099 forms and other information forms allow the IRS to match the forms against tax returns to catch under-reporting. The IRS uses computers to match tax return information to information returns (1099s, W-2s, etc.). These computers can then generate notice letters to taxpayers. Taxpayers who receive 1099s, W-2s, or other information returns should file a tax return with deduction of allowable expenses and costs related to such income. When taxpayers don't file tax returns, they risk the IRS or state tax authorities sending notice letters years later and assessing taxes, interest and penalties without any deductions. Taxpayers will have a more difficult task trying to file tax returns with proper deductions and expenses years after the fact. However, we have assisted taxpayers in filing back taxes with deduction for proper business deductions years after the fact. Taxpayers should bear in mind that the State of Alabama is very demanding in requiring substantiation and documentation for all deductions claimed on tax returns filed years late--especially when the State of Alabama Department of Revenue has already estimated and assessed your tax liability. My recommendation is to keep your records and pay by check or credit card--avoid cash transactions. Taxpayers who pay by cash will have more trouble trying to find substantiation for their deductions.
If you need assistance with notices, tax assessments, tax levies, or liens, please call us today at 256-539-9850.
Bowman Law Firm, Tax Attorney
