How to avoid PayPal 1099? President Joe Biden passed the American Rescue Plan Act in March 2021 which lowered some parts of the Internal Revenue Code. The law lowered the reporting requirement to receive a Form 1099-K in a calendar year for payments received from online processors like PayPal. Before this law was passed, many self-employed individuals avoided taxes by using online payment processors.
PayPal is required to report gross payments received for sellers who receive $20,000 in gross payment volume AND 200 transactions or more. Many freelancers took advantage of this low reporting requirement by staying under the minimum condition and not paying taxes. The current laws do not require you to report payments on a Form 1099 for tax returns.
Now that PayPal will be issuing a 1099-K more often, it’ll be difficult to hide. You don’t want to risk a penalty for not filing a 1099. The actual amount of income reported to the IRS may even be higher than what you actually received. In this article, we’ll go over the updates to the tax laws and how it impacts freelancers.
How to avoid PayPal 1099?
Business owners may receive payments for their goods and services through a variety of means, including third-party payment platforms like PayPal. In past years, some businesses have taken advantage of the IRS threshold for issuing 1099-K forms in order to avoid paying taxes on payments received through these platforms–even though that income was taxable! However, this loophole will be closed starting in the 2023 tax season following the implementation of new reporting rules.
Initially, the new reporting requirements were to be implemented during the current tax season, but the IRS announced in late December 2022 that they would postpone changes to reporting thresholds until 2024 and treat this year as a transition period. Here is everything you need to know about Form 1099-K, including the current and future requirements and how they will affect whether you receive a 1099-K from PayPal this year or next.
What is a PayPal 1099-K Form?
Form 1099-K is an Internal Revenue Service (IRS) tax form used by third-party payment platforms like PayPal, Cash App and Venmo to report income for any business earning more than the given threshold. If you have surpassed $20,000 in earnings and 200 transactions with your PayPal business account, you will receive a 1099-K form from PayPal by January 31st. You are required to include this 1099-K in your tax filing as proof of income, along with any other relevant self-employment tax document.
To make sure you receive your PayPal 1099-K form on time, review your account information to make sure it’s accurate and complete. PayPal needs your address, business name, and tax identification number (TIN) to send you the form on time with accurate information. You can update this information in your PayPal account by accessing the Business Information section in your Account Settings, or in the case of updating your TIN by contacting PayPal directly.
Current and Future IRS Requirements for PayPal Sellers
For 2022 (as in previous tax seasons), users of third-party payment networks like PayPal will only be issued a 1099-K form if they made more than $20,000 and had over 200 transactions in a year. This means that if you are below either of these thresholds, you will not receive a 1099-K from PayPal for the 2022 tax season.
The American Rescue Plan Act of 2021 initially lowered the reporting threshold for 2022 taxes, requiring a 1099-K to be issued for third-party payment network transactions of more than $600 for the year, but with the recently announced postponement, this change will now go into effect beginning with the 2023 tax season.
This means that if you earn above $600 via PayPal in exchange for products or services in 2023, PayPal will send a 1099-K form to both you and the IRS, and you will be required to pay taxes on those earnings for the 2023 tax season. Remember, even without a 1099-K being issued, all of your business income is taxable!
As you prepare for tax season, you should be on the lookout for a PayPal 1099-K if you have used PayPal for your business and surpassed the 2022 thresholds. However, if you’ve only used a personal PayPal account for receiving gifts or reimbursements from friends and family, you will not receive a 1099-K form, as this is not considered taxable business income.
How to Reduce the Amount You Owe (Legally)
With the 1099-K reporting threshold dropping significantly in the 2023 tax season, it will no longer be feasible to avoid reporting income received through PayPal (nor is it advisable!). That said, there are ways to legally reduce the amount you will owe on taxes to save more of your hard-earned money when filing.
“Garage Sale” Selling
One thing to keep in mind is the difference between selling goods and services for profit and selling casually as a hobby. When you have a physical garage sale from your home, that income is not considered part of your gross income, making it non-taxable. This same rule can apply to certain income received through PayPal if you’re using the platform for “garage sale” transactions. For instance, if you are reselling old office furniture or getting rid of clutter on Facebook marketplace, these transactions may not be considered taxable profits.
In this case, you will still receive a 1099-K even if some or all of the income should not be taxable. If you receive a PayPal 1099-K for income that you don’t believe should be considered taxable, ask a CPA for support in filing the 1099-K properly.
One of the best ways to lower your taxes is by writing off business expenses. Business tax deductions are expenses directly related to your business that can be written off in order to decrease the amount you owe in self-employment taxes. These deductions don’t need to occur directly on PayPal to make a difference—any tax deduction will count against your total balance owed.
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