paypal 1099
1099, Being Freelancer, Finances and Taxes, Self-Employed, Taxes

Paypal and 1099s

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”.

You can learn more about the 1099-K on the IRS website here. You can also view a sample of the form here.

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.

Companies, Income, Uber

Two Incomes Are Better Than One

The other morning, I waited on my doorstep for the Uber Car to arrive. Suddenly, a Prius pulled up with a big Bento Food advertisement on the passanger door. I just assumed it was some freelance food delivery guy, but when he rolled down the window and said ‘U Scott?,’ I knew it was my Uber man. I am slowly seeing Uber and Lyft cars with advertising for other companies on their car doors. This is a smart on-demand move by these 1099ers; the only draw back is that it confuses the passenger. Bento is paying paying these drivers $200+ a month to have their big fat sticker on their car. The driver is armed with little post cards with $8 off coupon numbers that they distribute to the customer. The driver receives $1 for every transaction. I expect to see more of these drivers test out the waters in other On-Demand businesses. And of course, they can find all the domestic ones listed her at the On-Demand Society website.

Being Freelancer, Finances and Taxes

Paying yourself

You might start out as a freelancer / 1099, but then decide you can start your own business. If you go down this path, you will have to figure out how much you should pay yourself. Here are some tips.

Here are some basic rules for how you should think about paying yourself

  • There are no rules to how much you pay yourself.. but below are some things to consider
  •  If you want to pay yourself, you need to incorporate (according to the IRS)
  •  Payment should be reasonable (see below)
  • If you can afford it, pay yourself, but pay yourself last — after paying off expenses, employees, etc.
  • Work with your accountant to identify potential deductions (at the beginning of your business) so you can set up your accounting software properly and more important, pay less in taxes later on.
  • Pay yourself what you are worth (not more), so do some research (More on this below)

One (Wilder) rule of thumb:

  • Aim for 50% Gross Margin
  • Aim for 30% Operating Expenses
  • Aim for 20% Net Income Before Taxes

… That is of course, if you can dictate what you salary is. If you can’t, however, think about using the formula for the money you do earn

Payment Options

  • Paycheck / Paying yourself- Even if you don’t need the money, it is good to get in the habit paying yourself to set up payment processes
  •  Withdraw money basis on the how the company is structured and also has tax benefits as you are reducing your overall process
  • Put some money away for future, personal use
  • Recommendation: Write up an agreement to pay yourself later (might want to put something in writing in case you grow and take on new investors, business partners, etc.).. deferring payment to yourself, though, becomes a liability for the company and needs to be accounted for.

How to start and How Much

  • If you pay yourself, set up a consistent time / day to be paid such as weekly. Start by paying yourself as little as possible, but enough so you don’t struggle in making ends meet. The key is not to stress about having enough money to eat, pay bills, etc. Otherwise, there could be added stress to your life as you try and make ends meat. This can also be the case if you have a spouse or partners, etc.

Reasonable Compensation

  • Defined as the amount a similar business would pay for similar services
  • Most officers of a company are generally employees with wages and subject to the same tax issues.
  • Wages should be ‘commensurate with your duties in the company’
  • Must prove services were completed/performed
  • You need to prove that pay is reasonable which depends on the services you provide
  • IRS suggests you consider the followings (This is taken from the IRS site)
    • The duties performed by the employee
    • The volume of business handled
    • The character and amount of responsibility
    • The complexities of your business
    • The amount of time require
    • The cost of living in the locality
    • The ability and achievements of the individual employee performing the service.
    • The pay compared with the gross and net income of the business, as well as with distributions to shareholders if the business is a corporation

You might also want to talk to some Founders who have started companies comparable to yours and see what they pay themselves. Ask them the number of employees the have, their revenue, and years in business. This also is a good way to jump start networking with your industry peers.

Based on Legal structure

Your legal structure can impact what you can pay yourself. Basic rule, however, is this: If you want to pay yourself, incorporate! If you are an officer of a corporation

  • Must be on payroll
  • Must receive paychecks / direct deposits
  • Must include / withhold taxes for Social Security, Federal, State (medicare)

If you are part of an S-Corp:

  • Must receive a paycheck
  •  Company doesn’t file own taxes (same with LLC)
  • Can take money beyond your regular salary
  • An S-Corporation is not subject to corporate tax rates.
  •  Need to pay reasonable salaries to self and employees
  • Can pass loses to shareholders which will reduce their taxes
  • Note: Need to set up a board of directors which could dilute your influence in the future direction of the company.

If you are part of LLC

  • Pay yourself by taking money out (Note: If you just pass the money to the person who owns the company, then you are paying yourself as an employee)
  •  Paying yourself is referred to as a ‘draws’ and is different from paying an employee. If you pay an employee employee, federal and state taxes are withheld. You also withhold social security and medicare.
  • If you take a draw there is nothing withheld and therefore you have to make your own estimated tax payments, usually quarterly), pay your own taxes. Note: If you pay yourself and don’t do quarterly tax estimates (paying the IRS), you could be in for a surprise — sticker shock — when you see your tax bill at the end of the year. (I know : )
  • Use a check from your LLC bank account (keep personal and business banking separate)
  • Don’t need to set up a board of directors

If you are part of a Sole Proprietors/Partners

  • Free to pay themselves whatever they want
  • Payroll taxes/withholding don’t apply, but each person pays the same
  • Recommend paying on regular basis
  • Do quarterly taxes estimates with IRS (so should build a business plan with your tax estimatesPartners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership.

Always think about deductions which can be viewed as type of compensation and can reduce the amount you pay in taxes.

Business Expenses/Deductions

  •  Form of payment to an owner
  •  Defined as both “ordination and necessary”
  • Ordinary — common and acceptable in your trade or business
  • Necessary — is helpful and appropriate
  • Can not include personal, living or family expense
  • f an expense is for both, divide them and deducted the business part
  • A word about your Home and your Car:
    • You can deducted mortgage interest, insurance, utilities, repairs and deduction
    • You can deduct the percentage of the house (% of rent or mortgage used for your work)
    • You can deduct car expenses if you use your car only for business
    • If you use your car for both for personal and business, you must divide your expenses based on actual milage. Formulas to calculate car deductions:
      • 56 cents per mile for business miles driven
      • 23.5 cents per mile driven for medical or moving purposes
      • 14 cents per mile driven in service of charitable organizations
      • Tip: Keep expenses separate from busines

The Right Payment

  • Determine what’s appropriate after taking out business costs, taxes, money invested back into the company
  • Talk to other comparable companies
  • Talk to your local SCORE, SBDC, etc. offices to determine what other companies that are comparable in size (revenue, #employees, etc.), stage of business, etc. are doing
  • Determine if you afford to pay yourself
  • Determine if your company is profitable and if it is reward yourself
  •  Think About what you pay your employees
  • Note: If you overpay yourself, it will raise a red flag for the IRS so work with your accountant to determine ‘what’s reasonable’

 

When not to pay yourself

  • If you have large account receivables
  •  If your employees have not been paid

FINAL REMINDER Have the end in mind — but do this by creating a business plan

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Paying-Yourself