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If you’re an independent contractor, you may use Paypal quite frequently to collect payments from clients. Hence, you might receive a 1099-K from Paypal and probably have a few questions about it. What is it exactly? Is it any different from all those other 1099s you received?
As Paypal becomes more and more popular for payment processing for independent contractors, more rules are being set in place by the IRS to account for this income. Here is everything you need to know about a Paypal 1099:
The Basics Of A 1099-K
Most independent contractors will receive a 1099 from their clients. A client will typically send a 1099-MISC to any freelancer who they paid more than $600 in the tax year. A copy will also be sent to the IRS.
1099s come in many different forms but all serve the same purpose of reporting income. For example, a 1099-INT reports interest income earned. A 1099-K reports income earned from electronic payment processors or “payment card and third party network transactions”. This was created largely because using payment processors, like Paypal, have become increasingly popular among the self-employed. In the past, this income wasn’t being captured but the 1099-K now insures that it does.
Requirements for a 1099-K
If you received payment through Paypal, you might not necessarily receive a 1099-K. 1099-Ks are only required if there were 200 or more transactions processed and the total amount issued was over $20,000. Both requirements have to be met. For example, if you received $30,000 in payment through 100 transactions, you will not be receiving a 1099-K.
The payment processor will send you a 1099-K by January 31st and you will also be able to find a copy in your account. A copy will be sent to the IRS as well.
Reporting Paypal commission
The income reported on the 1099-K may include commissions earned from Paypal as well. They should provide you with a breakdown of this income if so. On your Schedule C, you should report this commission as both an earning and an equal offsetting expense. This is way, you won’t be taxed on the commission.
What To Do If You Don’t Get A 1099
If you don’t receive a 1099-K, you should still report any earnings on your Schedule C.
Click here for more information about 1099-K’s