***I AM NOT A TAX EXPERT. THIS IS NOT ADVICE. DO NOT EVEN TAKE IT ANY OF IT AS A SUGGESTION FOR YOUR OWN TAXES OR BUSINESS. THIS IS A PERSONAL EXPERIENCE. IF YOU WANT REAL ANSWERS, SCHEDULE A MEETING WITH A TAX LAWYER OR CPA YOURSELF. DO NOT MAKE ME BAN YOU FOR BEING STUPID. THANK YOU.***
Today’s post happened because when a blogger puts hours into something, they blog about it. Hopefully it’ll help some other self-employed person out there who uses Paypal for everything.
My husband and I work from home with the online business I created in 2011. I blog and we manage the advertising for my sites and other bloggers. My online business uses Paypal for 99% of its money stuff. The other 1% of our business is through personal checks.
When we get paid for groups (via Paypal), we then have to send everyone their cuts (via Paypal). When our clients are paid for their own deals, they send us our cut (via Paypal). I also do deals on my own sites, receive commissions from my eBooks, and get paid for freelance work and writing (all via Paypal). Altogether, we are a great Paypal client and make them tons of money.
I figured out a way not to feel bad about all of their fees. They save us hours and hours and some money for tax forms every January. I took the plunge and learned how to do taxes online finally. I know, I was waaayyyy behind.
Every January, Mr. BFS and I receive the same question about a dozen times – “Will you be sending me a 1099?”
“Payments made with a credit card or payment card and certain other types of payments, including third party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K. “
And on the information from the Instructions for Form 1099-K:
“If you receive payments from a PSE on behalf of one or more participating payees and you distribute such payments to one or more participating payees, you are:
The participating payee with respect to the PSE who sent you the payment(s), and the PSE with respect to the participating payees to whom you distribute the payments.”
This means that we are considered the Payment Settlement Entity for you (our clients), but because we pay you with PayPal (who is also a Payment Settlement Entity), there are multiple PSEs for you. This problem is also addressed in the Instructions for Form 1099-K:
“If two or more persons qualify as PSEs for the same reportable transaction, the PSE that submits the instruction to transfer funds must file the return.”
The Payment Settlement Entity in this case is PayPal. While we tell PayPal to pay you, PayPal is the actual PSE that submits the instructions to a bank or other financial institution to transfer the funds. PayPal is responsible for submitting to the IRS and to you a Form 1099-K if you received enough income through them during 2013.
Now, it is possible that you may disagree with my understanding of what “submits the instruction to transfer funds” means. However, even if we are considered to have submitted the instructions to transfer funds, we used PayPal to complete that transaction. Therefore, PayPal was an Electronic Payment Facilitator. From the Instructions for Form 1099-K:
“If a PSE contracts with an electronic payment facilitator (EPF) or other third party to make payments in settlement of reportable payment transactions on behalf of the PSE, the facilitator or other third party must file Form 1099-K in lieu of the PSE.”
Because we used PayPal to complete the transaction, PayPal is the EPF and must file Form 1099-K instead of us.
We also got all of this information verified by a rep at the IRS Information Returns Center on January 23, 2014. It took 2.5 hours of calls and hold time to find the right place and person with the info, but now we at least have her to back us up. 🙂
Also, if we were to send a 1099-MISC for $1000 (for example) to you and PayPal sent you a 1099-K for $1000 (because we paid you using PayPal), it would appear as if you made $2000 when you only actually were paid $1000.
So, if you make more than $20,000 a year via Paypal in 200 or more transactions, all of that income will be reported via Paypal’s 1099-K. Yay for small business owners like me! If you made less than $20,000 with Paypal, you should report the income but you won’t be receiving a 1099-K. This also means that my clients that pay me via Paypal don’t need to send me a 1099-Misc either. Paypal will cover it with our 1099-K. Double yay!
Hope this helps! Do you have to send 1099’s every year?