If you are a freelancer accepting payments through PayPal, then this tax guide is for you. Regardless, in this article, we'll cover when you'll receive a PayPal 1099 tax form, the different forms you'll deal with, taxes you'll need to pay, tax deductions, and more.
After reading this guide, you'll discover everything you'll need to know about handling your PayPal taxes. Let's dive into the different tax forms you'll receive.
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There are a few tax forms you'll typically receive as a freelancer who uses PayPal to receive payments. The two IRS forms are the 1099-NEC and Form 1099-K.
The 1099-K is the most common form sent to freelancers who use PayPal. A Form 1099-K is a variation of Form 1099 that is used to report payments made through reportable payment card transactions and/or settlement of third-party payment network transactions.
The requirements to receive the 1099-K is if you processed over $20,000 in payment volume AND you had 200 transactions or more. In 2022, the requirement will be lowered to $600 in received payments in order to catch those who try to avoid a PayPal tax form.
If you meet these conditions, in most States, PayPal and other payment settlement companies are required to send you a 1099-K.
The 1099-NEC took over the reporting requirements for non-employee compensation from the 1099-MISC in 2020. The requirements to receive this form from your client is if you were paid at least $600 for services in the course of your trade or business. If you don't meet the 1099-K reporting requirements (less than $20,000 and 200 or fewer transactions), chances are you'll receive this form.
As we mentioned before, depending on what State you reside in or identify with for your taxes, will determine what 1099 form you'll receive. For example, Vermont, Virginia, Maryland, and Massachusetts have a slightly different reporting threshold. If your total income from your payment firm exceeds $600, you must file a 1099-K rather than a 1099-NEC.
However, Biden is introducing new laws in 2022 to crack down on folks who use PayPal to avoid paying taxes.
U.S. President Joe Biden is introducing a new minimum threshold to receive a 1099-K from PayPal under the American Rescue Plan. The new law requires PayPal to send out a 1099 form if you received $600 in payments with no minimum transactions. This rule will take effect on Jan. 1, 2022.
The new law applies to company transactions that are frequently done with cash applications like PayPal such as Venmo and PayPal. Because recognizing income through cash apps was difficult in the past, sellers on Etsy and eBay were able to go largely undiscovered in terms of how much money they were genuinely bringing in.
This law will also affect online sellers who need to file their eBay taxes.
If you don't meet the requirements to receive a 1099 form, you still need to pay taxes on the income you earn. Let's say you earned $550 in payments from a client through PayPal. Your client is not required to send you a 1099 form but you'll still need to pay self-employment tax and income tax on the earnings.
An exception for paying self-employed tax on your earnings is if you made less than $400. Then you would not be required to pay self-employment tax but you will still be required to file your income taxes.
As a freelancer or self-employed business, you'll need to file your self-employment taxes on your income. The self-employment tax rate is composed of Social Security (12.4%) and Medicare (2.9%) taxes.
As a self-employed business owner, you'll be required to send estimated tax payments on your income four times throughout the tax year. The dates to send in quarterly payments are:
If you fail to make quarterly taxes on time, then you could pay a penalty.
For detailed instructions on how to send in your payments, read our resources on how to send quarterly tax payments.
An EIN is a unique 9 digit number assigned by the IRS to business entities operating in the United States for the purposes of tax identification.
When you create a PayPal account, they may ask you to give your Taxpayer Identification Number (TIN.) A Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), or Employer Identification Number (EIN), to your existing account (only if you don't already have one on your account).
If you don't provide a Social Security Number, then you will be asked to provide your EIN.
As a freelancer, depending on the freelance work you do, you'll be able to claim tax deductions to lower your taxable income. Here is a list of common tax deductions you could qualify for:
Read our fill resource here for more 1099 deductions and save more money.
There you have it. Everything you need to know to file your PayPal taxes. Remember, all income from sales or services you earn is taxable. All your income should b reported to the IRS. We hope this article has made it much easier to report your taxes to the IRS.
For more ways to get help with filing your tax return, we always recommend you get in touch with a tax professional. If you have transaction or account issues, contact customer service via PayPal. You could also search PayPal's tax resource to search common questions asked by other freelancers to file a tax return.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?