Over the years, Paypal has become more and more popular as a payment processor between independent contractors and clients. As we approach tax season, many freelancers are faced with a new question: how do you handle income from Paypal? How do you handle 1099s if most of your transactions conducted via Paypal
Many independent contractors this year will receive a Paypal 1099. If it’s your first time dealing with this type of 1099, you’re in the right place. Here are 4 things you need to know about Paypal 1099s.
There are many types of 1099s
There are many different types of 1099s. All 1099s serve the same purpose of reporting income and earnings. A 1099-MISC is the most common for freelance income. You might also come across a 1099-INT for your bank interest. For income processed through Paypal, you will receive a 1099-K. A 1099-K is for income processed through “payment card and third party network transactions”.
The Paypal 1099 is new
The Paypal 1099 or the 1099-K is a fairly new document. In the past, income from payment processors, such as Paypal, wasn’t being captured. However, the number of paypal users grew increasingly over the years, especially those who used the service to transfer business income. As this presented a problem in itself, the IRS set up the 1099-K specifically to capture this income.
You may not meet the requirements for a Paypal 1099
Even if you did receive income through Paypal, you might not receive a 1099-K. Paypal is only required to send a 1099 to users who earned more than $20,000 in income and had more than 200 transactions. Both requirements have to be met in order for you to receive a 1099-k.
If you don’t receive a 1099-K but did receive income through Paypal, you should still report these earnings on your Schedule C.
Don’t forget about Paypal commission
If you do receive a 1099-k, one thing you should take into account are Paypal commissions. The total listed on your 1099 may include commission. If so, Paypal should tell you specifically how much and give you a breakdown of the total. On your Schedule C, you should report this commission as both income and an expense. This would result in a net of $0 and therefore, you wouldn’t have to pay taxes on this commission.
If you have questions specifically regarding your Paypal 1099, you can reach out to their customer service directly for help.