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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{ 13 comments }

Conie September 20, 2008 at 9:18 pm

I hope this isn’t a stupid question.. If you have an ebay store and your filing taxes, would you include your ebay earnings on your filing married jointly return. Or would you file your business seperately?
Thanks

Kristine September 22, 2008 at 8:24 pm

Conie – thanks for the comment. Not a stupid question at all!

If you have incorporated your business, then you must file a separate tax return in addition to your personal tax return.

If you have not incorporated, then you are a sole proprietor for tax purposes, and you file Schedule C – Profit or Loss from Business to report your eBay income, and you attach this to your personal income tax return (Form 1040).

Hope this answers your question! Kristine

robyns November 1, 2008 at 12:50 pm

how does this affect people that aren’t in business that just sell off old stuff from their house or cheap garage store stuff?

Kristine November 1, 2008 at 1:24 pm

Good question Robyns – People who are just cleaning out their garage will probably not receive a 1099. If you are a business owner and you also sell items from around the house, just keep good records. This new rule is really meant to track the big players… those who are earning a lot from eBay and online businesses.

alan January 26, 2009 at 4:44 pm

According to the above response, if you have a Ebay store, you would file on your personal taxes using Schedule C. Would this alos be the case if you have a business license, tax i.d. and Ebay store (with the Ebay store the only way your selling merchandise)?

Kristine January 27, 2009 at 3:09 pm

Alan – assuming that you are a sole proprietor (you have not incorporated, or are not a partnership), then yes, you report your income from your eBay store on Schedule C, which is attached to your personal tax return (Form 1040). The fact that you have a business license or Tax ID does not change how you file your taxes, but if you have incorporated or formed a partnership then you would need to file the appropriate business tax returns for those entities. Hope this helps.

Tim March 23, 2009 at 2:05 am

What if I don’t have a ebay store setup or a merchants account setup with payapl and I make $10,000 or more from ebay just from listing items. Is it reported then and if so how. I don’t recall puting in my SSN.

Johnson October 19, 2009 at 8:03 pm

Does anyone know if Paypal report my earnings to the Canadian Tax Agency or just the IRS. I make under $10,000 with Paypal? I just use it as a way to collect donations, and fees for advertising on mw websites.

Thanks,

John Gro November 2, 2009 at 4:50 am

Yep! Ebay and PayPal are now “in bed” with the IRS.

They probably get a break on their Corporate Taxes for being an “agent” for the IRS Collection activities. In my opinion, it will be their downfall – THE’LL NEED A BAILOUT SOON!

John

NIcole November 12, 2009 at 6:36 am

If you are a corporation buying from ebay, do you have to file a 1099 on each vendor? If you don’t will you get penalized? Is there an amount that you can do wih out submitting the 1099?

kathy March 4, 2011 at 5:35 pm

I’ve been selling cloths for about 7 years on eBay and have a store. Unfortunately, I did not save receipts at least until 12/2010. I kept them for a wile, but then assuming I was not going to need them I trashed. Am I in trouble now?

Vikas May 4, 2011 at 8:22 pm

So, what happens if I buy from CL and sell it on e-bay. That way you pay by cash but receive the funds in Paypal? How do you prove how much is your net earning?

Thanks

Zaira January 11, 2012 at 8:45 pm

I started selling online (Etsy) and getting paid thru paypal. I do not have a business paypal account use my personal account nor do I have a tax id #. How do I go about for taxes? I did about 2,000 last year. I’m clueless

Help
Zaira

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