If you receive a PayPal 1099-K, you need to be prepared for the possibility that a portion of your income might be double-reported to the IRS.
****Update: Check the following post for a more up-to-date discussion on 1099-K, and the requirements related to it.****
Last week, I received the new 1099-K form from PayPal. This wasn't overly surprising since I'd been expecting it. But it brought home an important point about this new form that the IRS expects: A lot of my income will be double-reported.
What is the PayPal 1099-K?
The IRS introduced the 1099-K a couple of years ago, but the tax year 2011 was the debut. The idea is that third-party payment processors (notably PayPal) are required to report income from transactions handled. The real targets are likely eBay sellers and others who make money each year with online auction sales or other types of sales and haven't been reporting their income.
Indeed, the IRS isn't going after the folks cleaning out their garages. A 1099-K is only issued if you have made $20,000 and had at least 200 transactions during the year. This is where a home business owner, especially a freelance contractor like myself, runs into problems.
Double Reporting Income to the IRS
Most of my payments are handled through PayPal. It's easy, and it ensures that I get paid. However, I fall into the requirements for reporting. So I get a PayPal 1099-K. Since I provide services to clients as an independent contractor, I'm getting another form: the 1099-MISC. For a home business owner, this can result in headaches galore.
My clients are sending 1099-MISC forms. Meanwhile, many of them have paid using PayPal. So PayPal is also reporting that income. Some of my income is double-reported to the IRS, so it looks like I am making more money than I actually am. This means an audit red flag could be raised because what I'm reporting as income isn't going to match what the IRS thinks I'm making due to the double reporting from the new PayPal 1099-K.
The result is that I will have to make sure I can match up which 1099-MISC forms come from people who pay me via PayPal. That way, if there is a problem, I can prove that I really haven't made as much money as the IRS thinks I have. It means extra work for me and my accountant this year (and probably in future years). Perhaps this situation can be resolved if I ask clients who pay by PayPal not to issue 1099-MISC forms. One of my bigger clients already decided not to issue the 1099-MISC, preferring to let PayPal do it. However, I don't know how that affects my clients and their efforts to report their expenses to the IRS.
Bottom Line: PayPal 1099-K
If you are a home business owner and have received the PayPal 1099-K, evaluate whether your income is being double-reported. Banks, PayPal, and other third-party payment processors must issue 1099-K forms. You need to be on your toes and know where all of your income comes from — and how your clients and customers pay you. Then, reconcile it all, and note what income is being double-reported.