What Small-Business Owners Should Know about Reporting Income from PayPal

Author : Camputaro & Associates
Feb 01, 2022

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PayPal and Venmo have been popular payment methods for years. Initially designed for personal transactions, they’ve become a common way for businesses to accept payments as well. In the past, these payment platforms were only required to report accounts with more than $20,000 of income to the IRS. However, a new law introduced in the American Rescue Plan last year will be changing that. Here’s what small-business owners need to know about how taxes on PayPal, Venmo, Zelle, and other such platforms are changing.

This Income Was Always Taxable

First, we want to make it abundantly clear that the taxability of income on these platforms is not actually changing. Regardless of how much you received through these payment methods in the past, it should have always been reported to the IRS when you filed your tax return. The only change is that the payment platform you use will be much more likely to report it as well; they are now required to report users with more than $600 in income, and must send tax documents to those users as well.

Does This Apply to Personal Payments?

As we mentioned above, these platforms were initially designed for personal transactions, like repaying a friend for your portion of the lunch bill, or paying your roommate your part of the rent, and the vast majority of users still rely on these platforms those transactions. Naturally, this tax change has led to some concern that personal transaction will also end up being reported to the IRS. However, this shouldn’t be the case.

As the PayPal website states, “PayPal monitors accounts to ensure that personal payments are not being used for sales of goods and services.” Essentially, these platforms are equipped to differentiate personal and business payments, and can report your income to the IRS accordingly. So, if you’re only using your account for personal transactions, regardless of how much is coming into that account, you shouldn’t have to worry about it being reported to the IRS.

What If You Have Personal and Business Transactions?

For most people, this change won’t offer any real impact to your taxes—business transactions have always been taxable, and personal transactions remain nontaxable. The people who will likely experience the largest complications from this tax change are those who use the same account for both personal and business transactions.

For example, let’s say that you make and sell handmade crafts online. You take payment through PayPal, but also use that same account any time a friend owes you money. Your sales are business transactions, but reimbursements are personal and nontaxable. While these platforms make an effort to monitor your transactions to determine if your account is being used for business or personal purposes, they’re unlikely to parse out the transactions for accounts that have both.

In the past, you would have simply handled this on your own, and only reported the business transactions to the IRS when filing your tax return. Now, however, PayPal will be sending a 1099-K to the IRS as well, and that form might very well include all of the transactions on your account. And if the income you report to the IRS differs from the income PayPal reports for you, you could end up facing a very big mess.

We strongly encourage small-business owners to set up separate accounts for personal and business transactions on any payment platforms that you use. Alternatively, you could reserve one platform for business transactions and use any others for personal payments. Either way, keeping your business and personal transactions separate is going to make filing your taxes much easier.

So What’s Really Changing?

When it comes down to it, the payment platforms themselves are the only ones truly being impacted by this tax law change. They’ll need to monitor and report far more accounts than they used to. For small-business owners and self-employed individuals, difficulties should only arise if you’re not separating those taxable transactions from the nontaxable ones. We strongly encourage you to set up separate accounts for these transactions now, so that any payments you receive for the rest of the year will be appropriately accounted for.

If you have any questions about this tax law change or how it might impact the way you make and receive payments, we invite you to reach out to us and speak with one of our tax experts. We’ll be happy to answer any questions you may have, and guide you through the best way to manage those payments for tax purposes.

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Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174
(386) 255-2511