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 probably been using PayPal more than you would've thought of a couple of 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.
The decision to make the payment as PPFF or to alter it to a goods and services payment, transferring the fee to the receiver, is available just before you complete the transaction.
Tax Reporting Rules: IRC Section 6050W
Now the most important question is: Is PayPal Friends and Family taxable?
Sellers of websites like eBay, Uber, Etsy, and others that are using third-party payment systems (i.e., PayPal) are currently only required to submit tax forms if they take part in a minimum of 200 transactions and have a gross payment volume of $20,000 or more, according to the regulations of IRC Section 6050W.
A 2012 legislation mandates that third-party payment services disclose the revenue that taxpayers receive. You may or may not get IRS form 1099-K if you accept payments via PayPal.
Therefore, it's not always certain that you will obtain IRS form 1099-K if you accept payments using PayPal. Form 1099 is reserved especially for third-party payment providers.
Do You Have to Pay Taxes on PayPal Friends and Family?
The answer is a shaky no. The IRS and PayPal state that if you surpass both of the above levels in a calendar year, Form 1099-K will be sent.
- A single calendar year's worth of sales-related gross payment volume of $20,000, AND
- 200 payments made in the same year for goods or services (excluding Massachusetts and Vermont, where the threshold is lower, irrespective of the transactions made).
As mentioned above, it is important to note that the second criterion is an exception in Massachusetts and Vermont. Why? Because 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 situation, you would not (with the exception of a few states) get a tax form from PayPal. However, you would still need to record any taxable income you received through these sites on your income tax return.
Are personal payments included in the criteria of IRC Section 6050W?
PayPal Friends and Family transactions will not be included in the commercial transactions that are notified to the IRS. However, in order to adhere to governmental financial restrictions, PayPal closely monitors all platform transactions. As a result, it can establish if business users are abusing the PPFF option to avoid paying taxes.
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 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
In order to minimize confusion, here are some tips related to PayPal income:
- PPFF is not subjected to taxes. However, if you earn through such platforms, you must report any taxable income 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.
- Submit any income received from PayPal on your tax return.
- If you do not report it, it will be viewed as under-reported earnings and the chance of fine and interest.
The Bottom Line
Finally, to summarize the answer of the most important question of this blog: does PayPal report to IRS on Friends And Family? No, there are no tax implications for accepting money via PayPal Friends and Family.
You must only include on your income tax return any taxable income you receive from these sites. It is best advised to record it and retain copies of the receipt if you earn any kind of revenue via PayPal.