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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The Tax Forms You'll Receive
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.
All About The 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.
Different State Requirements
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.
Biden's New Laws For 2022
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.
What If You Received Less Than $600 In Payments Through PayPal?
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.
Self-Employment Tax 101
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.
Quarterly Tax Payments
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:
Do you need an Employer Identification Number (EIN)?
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.
Tax Deductions You Qualify For
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:
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.