Peer-to-peer (P2P) payment apps have made mobile money transfers very convenient for businesses and individuals. From splitting a restaurant bill with your friends or collecting payment for your local business, you've likely been using PayPal more than you would've thought of a few years ago.
Apart from business transactions, PayPal Friends And Family, also called PPFF, is dedicated solely to non-commercial payments. But are there taxes you should be aware of? Does PayPal report to IRS on Friends And Family?
In this article, we'll understand the tax implications of the IRS on PayPal.
PayPal Friends And Family
PayPal Friends and Family (PPFF) was designed to be used as a way to transfer money between family members and friends. PayPal is used for payment by businesses or for business-related transactions, but PPFF allows a close network of people to send and receive funds for personal use.
PayPal’s PPFF is a great choice for sending gift cards or money to friends and family, i.e., for all non-commercial activities. Nonetheless, using PPFF to pay for goods or services isn't the best option. Doing so could lead to the loss of money as well as goods. Just before you finish the transaction, you can choose whether you want to make the payment as PPFF or to change the payment to a Goods and Services payment, therefore passing the fee onto the recipient.
Tax Reporting Rules: IRC Section 6050W
Internal Revenue Code (IRC) Section 6050W has made it mandatory for all the payment processors of the US, such as PayPal, Etsy, etc., to provide information to the IRS about some customers who receive payments for the sale of goods and services through PayPal. So if you receive payments through PayPal it's not always assured that you will receive IRS form 1099-K. The form 1099 form is designated specifically for third-party payment services.
Does everyone receive Form 1099-K?
The answer is no. As per IRS and PayPal norms, Form 1099-K will be issued if you exceed both the following thresholds in a calendar year:
- Over $20,000 in gross payment volume from sales of goods or services (not personal payments), and
- Over 200 separate payments for goods or services in the same calendar year
The second criterion is an exception in Vermont and Massachusetts. There the threshold is lower, irrespective of the number of transactions.
Here’s an example. Suppose you made $40,000 worth of transactions on PayPal in one year but only 150 transactions total (as processed by PayPal). In this case, you would not receive a tax form from PayPal (except in a couple of states); but you are still required to report any taxable income you earn through these platforms on your income tax return.
Are personal payments included in the criteria of IRC Section 6050W?
Commercial transactions will be reported to the IRS, not PayPal Friends and Family transactions. But PayPal monitors all the transactions on the platform in order to comply with government financial regulations. Thus, it can determine if commercial users are exploiting the PPFF option in order to evade tax obligations.
PayPal Taxes on Receiving Money: IRS Rules On Reporting PayPal Income
According to the Internal Revenue Service, any income you receive is to be reported to the IRS on your income tax return. But given the convenience of PayPal as a payment service, several independent contractors, small businesses, and freelancers receive some, most, or even all of their income through PayPal. Thus, it is one of the most common payment platforms for those who transact business on the Internet. But this process has some complications as well.
1. Personal Payment Vs. Income
Not all of the funds in your PayPal account come from income. For example, personal payments from family and friends. This transaction is not income, but rather a simple transfer of funds.
2. Multiple 1099 Forms
The bigger complexity is faced by independent contractors, small businesses, and freelancers.
- 1099-MISC may be issued by clients to report income paid to the contractor. It also presents a paper trail of any deductible expenses for the client.
- 1099-K may be issued by PayPal and it includes payments made through service from the clients who also issue their own 1099.
Let us suppose you receive 1099s from four different clients reporting a total of $40,000 in payments. Now if all the transactions are made through PayPal, PayPal may issue form 1099-K, also for $40,000.
Reporting 1099 Income and Non-1099 Income
Now wondering how much money you can make on PayPal without reporting taxes? An important point to note is that any income that you receive via PayPal must be included in your tax returns, whether or not it is reported on Form 1099.
Nevertheless, reporting your income on Schedule C will give you an added advantage to deduct business expenses that are related to the production of your income
PayPal Report To IRS On Friends And Family
You shouldn't have to report to the IRS on PayPal Friends And Family transactions; it is only applicable for commercial transactions. But in order to comply with the financial regulations of the government and keep tax evasion at bay, PayPal monitors all of its transactions.
For buying goods and services, PayPal reports transactions from sellers who receive more than $20,000 in gross payments and more than 200 separate payments within a calendar year.
Tax Deductions On PayPal
If you've reported your income as a sole practitioner on Schedule C, you will get the added advantage of deducting business expenses that are related to the production of your income. This can be done regardless of the amount of income earned, or the expenses claimed.
PayPal fees, such as bank fees, are a part of the process and expenses that PayPal has to bear to collect income from clients and other sources. The fees typically range from 3% on domestic income sources and a little over 4% on international income sources.
Some other expenses may include:
- Computer and/or cellphone usage
- Home or business rent
- Cost of business-related supplies and inventory
- Cost of business equipment
- Cost of business-related travel
- Cost of marketing and advertising
- Cost of internet and web hosting
Some of these business expenses might be paid through your PayPal account. So, apart from PayPal fees, any business-related expenses made through the online service will also be deductible.
However, it’s imperative that you keep the receipts related to those expenses. Even if they show up in your PayPal account they aren't deductible. Written receipts from the merchants or service providers will be needed to document the business nature of the expenses claimed.
Tips Related To PayPal Income
Both last year's taxable business income and this year's income are subject to taxation. Gift receipts from the previous year are still exempt from taxes this year. The legislation governing what income is taxable and what is not has not changed, yet there are fewer and fewer opportunities to cover up unreported taxable income.
In order to minimize confusion, here are some tips related to PayPal income:
- PPFF is not subjected to taxes, but you must report any taxable income you earn through these platforms on your income tax return
- Taxes are applicable for commercial transactions
- Payment of estimated quarterly taxes in case of a significant amount of revenue on PayPal. These taxes are due on April 15th, June 15th, September 15th, and January 15th of the upcoming year.
- Along with the federal income tax on your business profit, cover the self-employment tax (15.3%).
- Payment of estimated tax payments reduces income tax. Also, helps avoid the possibility of fines and interest for late tax payments.
- Keep the receipts related to business expenses.
- Report any income received from PayPal on your tax return.
- Failing to report will be considered as under-reported income and the possibility of penalties and interest.
The Bottom Line
TLDR; does PayPal report to IRS on Friends And Family? The answer is no, there are no PayPal taxes for receiving money via friends and family.
You are only required to report any taxable income you earn through these platforms on your income tax return. If you receive any income whatsoever from PayPal, it's best recommended to document it and keep records of the receipt.