What online sellers need to know about setting up PayPal
For anyone selling goods online, PayPal is a stalwart payment option that has been helping buyers and sellers finalize deals for nearly 20 years. PayPal is popular for the simple reason that it is easy to use. Credit card processing is fast and doesn't require the buyer to create an account.
Even if you're the kind of person who only logs into PayPal to make withdrawals from your account with your physical bank, you still need to be aware of how your PayPal account works and how it can affect your tax liability. This is especially true if you are using PayPal as a payment option for your small business.
What PayPal is telling the IRS about your business
If you didn't know PayPal reports your transaction data to the IRS, it's possibly because the legislation is relatively new. IRC Section 6050W became law in 2012 and only went into effect in 2014 as people began submitting tax returns. The new law states that PayPal will report details of your account directly to the IRS if you meet the following limits in a calendar year:
- $20,000 in gross payment volume from sales of goods or services in a single year
- 200 payments for goods or services in the same year
Once you cross those thresholds, PayPal will send Form 1099-K to the IRS, with a copy issued to you.
Be aware that the figure provided will be a gross amount. Shipping charges and chargebacks will not affect the total; you will only see the total amount of money received into your PayPal account, excluding any personal payments received. It's critical that your own records match the figures stated on the 1099-K.
Three things that can help you reconcile your 1099-K
PayPal transaction charges
PayPal is not, as some people seem to believe, a free service. If you go through your statement, you'll see that there are transaction charges, and these charges can vary a lot depending on the nature of the transaction and the location of the payer. This is further complicated by the fact that senders can sometimes choose to pay charges themselves or pass the charges on to the recipient. Like all banking charges, transaction charges are an expense that can be offset against your tax liability.
The simplest way to keep track of theses charges is to pull the totals from your monthly reports. You can do this by logging into PayPal and going to History > Activity > View Account Statements. Don't see that option? Reports are only available to business accounts. If you are still running a personal account and haven't upgraded, now is the time to do so.
Regional Sales Tax
If your business is collecting sales tax, you can use PayPal's Regional Tax functionality to automatically incorporate it into all sales transactions. Doing this is really easy. Just go log into your PayPal account, navigate to My Account > Profile > Regional Tax and follow the steps from there.
PayPal can calculate tricky interstate and international transactions using this information, but there's also the advantage that your PayPal statements will show your tax payments. That should make it a little easier for you to balance your 1099-K at the end of the year.
One of the things most likely to trigger an audit is a big discrepancy between your declared income and your 1099-K. Remember that the figure reported to the IRS is the gross amount, so if you've had lots of refunds and chargebacks, then you may trigger a 1099-K even if you haven't actually earned a dime from PayPal. For this reason, it's really important to keep track of reversed transactions, especially if they resulted in withdrawals from your bank account or credit card.
Ultimately, getting the best out of PayPal requires the same steps as working with any physical bank account: monitor your statements, watch out for hidden fees, take advantage of helpful features and make sure that you've got a complete picture of your finances at all times. You never know when an auditor might come knocking.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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