PayPal 1099 Taxes: The Complete Guide
Whether you sell on eBay, your own website, run a brick and mortar retail store, or freelance, filing your PayPal 1099 tax forms can feel intimidating. From writing off tax deductions to estimating your self employment 1099 tax rate, making a mistake can have harsh legal consequences.
Rest assured that if you follow the advice in this guide, you will have all the tools you need to file your taxes correctly.
You will discover:
- How to file your PayPal 1099 taxes
- Which 1099 you will need
- How and when you will get your 1099 form
- When you need to report your PayPal 1099 taxes
- The penalties for filing late
- Which expenses you can write off as a merchant or freelancer
- How to automate your business expense tracking
How to File Your PayPal 1099 form?
Filing your Paypal 1099 taxes is simple. I know when you hear the words taxes and simple in the same sentence you may be skeptical. We are going to address all of your concerns in this section.
The first step on your journey will be figuring out which 1099 form to file.
Which 1099 Form Will I Need? 1099-NEC vs 1099-K
There are two options of 1099 forms that you could have to file:
- The Form 1099-K. If you processed over $20,000 in payment volume and you had 200 or more transactions, PayPal and other payment settlement companies are required to send you a 1099-K in most states.
- If you had less than $20,000 and 200 or fewer transactions, then you usually have to file the 1099-NEC Nonemployee Compensation. This is replacing the Form 1099-MISC Miscellaneous income from previous tax years.
Both 1099 income forms are used for reporting income to the IRS but vary depending on the state you live in and how much in payment transactions were processed for you.
There are slightly different reporting requirements for Vermont and Massachusetts. If you make over $600 in total income, from your payment company then you will have to file a 1099-K instead of a 1099-NEC.
Believe it or not, filing the wrong 1099 is not the worst mistake taxpayers can make. Many people think they don’t have to report their taxes if they made less than $600 or don’t get a 1099. This is a common misconception because the IRS doesn’t require a company to issue the payee a 1099-NEC if they were paid less than $600. The independent contractor who got paid still has to report all their income, even if the income for your 1099 was under $600. The only difference is they are solely responsible for reporting that income to the IRS. If you fail to report all your income, then you open yourself up to IRS penalties.
How and When Do I Get My PayPal 1099?
Getting your PayPal 1099 form is super easy. You can either wait for your 1099 to come in the mail or you can find it in your PayPal account. The forms are usually available by January 31st or later if you choose to receive it in the mail.
If you didn’t get one by January 31st, contact their customer support. Do not assume that you don’t have to report your self employment income if you don’t get a 1099.
Next we are going to discuss the difference between annual and quarterly taxes.
When Do I File My PayPal 1099 Taxes?
Mostly everyone has to file their taxes at least once every calendar year. If you are a self employed business owner or freelancer, then you may have to file your taxes 4 times during the course of the year.
Your 1099 income will be reported on your annual taxes, which is due on April 15th at the time of writing this article.
If you are expected to owe the IRS over $1,000 come tax time, then you have to file quarterly taxes. Quarterly taxes are estimated by the gross revenue you made during the last quarter.
The quarterly estimated taxes due dates are:
- Quarter 1 - April 15th
- Quarter 2 - June 15th
- Quarter 3 - September 15th
- Quarter 4 - January 15th
*These dates are subject to change due to COVID.
If your income changes month to month, then it becomes a challenge to guess how much you owe. If you underpay, then you will owe penalties. If you over pay, then you will get a refund but you will have to wait. Make sure to use a trusted quarterly estimated tax calculator so you don’t risk underpaying.
Don't worry about overpaying your quarterly estimated taxes. Keep in mind that you are not allowed to write off your business expenses on your quarterly taxes. You have to wait until you file your annual tax return. More on tax deductible business expenses in a bit.
What Happens if I Don’t File My Taxes On Time?
If you file your taxes even a day late, the penalty is 5% of your original tax bill and increases each month up to 25%.
If you owe the IRS and pay your bill late, then you face a failure-to-pay penalty of 0.5% which will build up the longer you don’t pay.
Don’t mess around with the IRS’ deadlines. One of the main reasons people pay their taxes late is because they don’t save enough from their self employment income to cover the bill. You must know the exact amount you need to save by using a self employed income tax calculator to avoid this problem all together.
Avoid Double Reporting
For some businesses, double reporting income is a major concern.
If you are a freelancer, sometimes your clients may report your income on a 1099-NEC. But if you processed over 20,000 in gross payments and have over 200 transactions, then PayPal will also report your income to the IRS. Payment settlement entities such as PayPal, Stripe, or Square are required to send out a 1099-K if you meet the reporting thresholds.
If you are going to process over the $20,000 and 200 in PayPal or other third party network transactions, then you need to tell your clients to not report a 1099-NEC on your behalf for the income they send to you through Paypal.
This way you will avoid your income being double reported by your clients and third party payment company. If you have double reported income, talk to your tax professional or CPA to fix this as soon as possible.
Writing off your Expenses as a Merchant or Freelancer
When you report your 1099 income to the IRS, they will tax you on that whole amount unless you use tax deductions. As a business owner or freelancer, you are allowed to use qualified business related expenses as a way to lower your taxable income.
Tax deductions can only be used when filing your annual taxes, not your quarterly taxes.
The most common tax deductions for freelancers or merchants include:
- The home office deduction. If you have a dedicated space of your home that is used only for work then you can write off that portion of your house for rent, mortgage interest, insurance, repairs and depreciation.
- Office furniture and equipment
- Merchant seller fees
- Work car or van
- The business portion of your phone bill, if you use the same phone both personally and professionally.
- Payment processor fees
- Business loan interest
- Professional services such as legal advice or consulting
- Website costs. Hosting, web design, or logo designs.
- Education and courses.
- Business related travel
- Marketing fees
- Half of a business related meal
- Travel expenses for business trips
The form you will be using to write off your business tax deductions is called a Form Schedule C Profit or Loss from Business. This form is really helpful because it's one of the biggest ways to lower your tax bill. However, it does have a catch. You have to keep an extremely detailed record of your expenses so you can provide proof to the IRS if you get audited.
The Best Method for Detailed Expense Tracking
If you are a small business owner or solopreneur, then hiring an accountant is not always the best option. You may want to do your own expense tracking to save money, but it can be very time consuming.
The best way to do this is to use an automated 1099 expense tracking app or software. This is especially true for taxpayers who don't separate their business expenses by using a different credit card or bank account. You can still have the same account and have the software separate your business and personal transactions for you.
This frees up your time and protects you if an IRS auditor comes knocking. Outsource this part of your business so you can focus your attention on making more money and doing what you love.