1 week ago 3

How do PayPal taxes work? Here’s what you need to know about reporting to the IRS.

If you have a PayPal account, you may wonder whether you need to report money you’ve received on your tax return. Recent changes in federal tax reporting requirements for payment apps like PayPal, Venmo, and Cash app have caused some confusion among taxpayers.

Here’s what you need to know about the reporting thresholds for taxable income received through PayPal and which tax form you can expect to receive if you made business transactions on the platform during the last tax year. We’ll also cover whether you need to pay taxes on all the money you received through PayPal and how this tax rule applies to small businesses, freelancers, and self-employed contractors.

The short answer is if you received payment for goods or services through PayPal, that money could be subject to income tax by the Internal Revenue Service (IRS). But money sent between friends and family is not.

Here’s a breakdown:

When business owners or self-employed individuals accept any payment for goods and services via a credit card, debit card, payment app, or even cryptocurrency, it’s considered business income. You’re responsible for correctly reporting it, but you aren’t the only one reporting to the IRS. If you conduct a certain amount in business transactions during the calendar year, PayPal and other payment apps are required by tax laws to provide your tax information both to you and directly to the IRS by completing a Form 1099-K.

There are two exceptions to this rule. The first is if someone sent you money flagged as “payment for goods and services” into your personal account. The second exception is if you sold a personal item for a profit, in which case the profits are subject to tax.

An example is hobbyists who flip furniture as a side hustle. If you bought an old cabinet for $40 and then put in some supplies and elbow grease to flip it for $220, the difference would be considered income. The good news is the supplies you used and the cost of the cabinet can be considered a business expense.

If you use PayPal to send money to pay your share of expenses with a roommate or repay your mom for a purchase, those transactions aren’t subject to income taxes. PayPal calls them “Friends and Family payments,” and they aren’t reported to the IRS and don't go toward meeting the reporting threshold for third-party payment apps.

Here are a few scenarios to help you determine which types of payments fall under IRS rules for income reporting and which ones are exempt.

Examples of business transactions:

Receiving payment for cleaning, food prep, or other professional services
Being paid for handmade jewelry or crafts
Flipping furniture and selling it for a profit
Earning money for mowing lawns or pet care
Getting money for providing transportation or delivering meals

Examples of personal transactions:

Receiving money for a dinner check you split with friends or family
Selling your used couch for less than you paid for it
Receiving money from your roommate to cover the groceries
Your spouse sending money for half the month’s utilities
Getting money to cover the cost of gas or a hotel for a group trip

The IRS, which required third-party apps to report business transactions over $20,000 during the 2023 tax season, is gradually phasing in a lower $600 transaction threshold that was passed as part of the 2021 American Rescue Act.

That means for the 2024 tax year, PayPal and other payment apps are required to do 1099-K reporting if your business transactions totaled $5,000 or more. During the 2025 tax year, that threshold will drop to $2,500 and by 2026, a $600 threshold will apply for ta x reporting purposes.

If the total payments to your Paypal business account meets the reporting threshold, PayPal will provide 1099-K forms in the mail, email or available for download that you can include with your tax filing. You may also receive one of these tax documents if you have a personal account that met the reporting threshold for transactions flagged as goods and services payments.

To ensure you receive an accurate 1099-K form, PayPal suggests you keep your business and personal account information updated with your correct address and social security or tax identification number (TIN). Keep in mind you may still need to make tax payments on Paypal income even if you don’t receive a Form 1099-K, especially in states that have lower reporting threshold such as Maryland, Massachusetts, Vermont, Virginia, and Illinois.

If you didn’t receive a 1099-K form, it may be available for digital download on the PayPal website. Log into your PayPal account, select “activity” from the menu and choose “tax documents” under the reports section.

The IRS says you shouldn’t miss the deadline to file your taxes if you didn’t receive a Form 1099-K or if you believe the one you received is inaccurate. You can request an updated document, and in the meantime, report the amount from your incorrect Form 1099-K in the entry space at the top of Schedule 1 (Form 1040), “Additional Income and Adjustments to Income.”

If you received a Form 1099-K but didn’t have any business income, you can put “Form 1099-K received in error” on your Schedule 1 Form 1040 either on Part I, Line 8z under “Other Income” or on Part II, Line 24z under “Other Adjustments.”

Yes, all third-party payment apps such as PayPal, Venmo, or Cash app are generally subject to the same tax rules and reporting thresholds. So whether you’re a sole proprietor or a bustling small business, if you have a business account that accepts payments on one of these payment processors, expect to receive a 1099-K form if you made more than $5,000 in 2024.

Previously there had been some confusion about whether Zelle was subject to these rules, but they’ve since sunsetted their mobile app to resolve any uncertainty. Zelle simply transfers money between banks or credit unions and isn’t a peer-to-peer payment system. Freelancers or self-employed taxpayers who received income on Zelle should report that income on Schedule C of their federal tax returns.

Not sure if you should report payments you received on PayPal as income on your federal tax return? Consult with a tax professional to receive accurate tax advice for your situation.

Personal payments between family and friends aren’t taxable and don’t count as income. However, business payments for goods and services made into your PayPal business or personal account are considered taxable income and will be reported to the IRS once the transaction threshold for the tax year has been met.

Some states have lower reporting thresholds than the current IRS tax rules. This includes Maryland, Massachusetts, Vermont, and Virginia which require third-party payment platforms to send a 1099-K form for any number of business transactions totaling $600 or more.

Illinois has slightly different thresholds which must be met including $1,000 in payments for goods and services and four or more separate transactions.

Read Entire Article