PayPal and Ebay Must Report to the IRS

by Kristine on July 30, 2008

Buried deep in the housing act that was just passed is a provision that requires credit card processors – including companies like eBay and PayPal – to report annual gross receipts of it’s merchants to the IRS.

Credit card processors will be required to file Form 1099 for each merchant that has at least $10,000 in gross sales and 200 transactions.

Companies have until 2011 to comply with this new law.

The purpose of this new law is to raise revenue for the housing recovery package and to close the tax gap that exists.  The IRS estimates that it loses billions of dollars in tax revenue from small businesses who under-report (or don’t report) income.

While I’m worried that this new law will cause the cost of business for small and online business owners to go up (in the form of higher eBay fees, higher PayPal fees, etc.), I also think that all small business owners should pay their fair share of taxes (I pay my taxes, why shouldn’t all small business owners?).

So here are some tips to help online business owners comply with the new tax law, without paying too much to Uncle Sam:

  • Treat your business like a business.  Register a business name, hire an accountant, keep good records.  The more you can do to treat your business like a business, the less likely the IRS will reclassify your business as a hobby.
  • Keep separate accounts and records – have separate eBay, PayPal and checking accounts for your personal and business activities.
  • Report your income!  Even if you don’t receive a 1099 from eBay, PayPal or the other companies that will be required to file one, you should still report all of your profits from your online business.
  • Learn what’s deductible and what’s not deductible – you’d be surprised how many people do not deduct business expenses because they don’t know they can.
  • Don’t be afraid of the home office deduction, and other deductions that have been labeled as a red flag.  Being a small business owner is a red flag, but that doesn’t mean you should go out of business, or worse, not report your income!

To read more about the new IRS rules, and how they affect online business owners, please visit Online Sellers Face New IRS Rules in today’s WSJ.

TurboTax® Online Federal Free Edition lets you file federal taxes online – FREE!

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