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Are your PayPal sales a hobby or business? You’re about to find out!

David Bauerlein quoted Mark several times in Tuesday’s Florida Times-Union article, “IRS to track online sales in search of unpaid taxes.” 

Read on for additional details . . .

If you collect money via an online payment service, such as PayPal, the IRS wants to know. Of course, it’s always wanted to know, but now it’s got a way to find out.

The IRS recently unveiled the PayPal (or Amazon, or eBay) reporting form—actually, the formal name is the Form 1099-K, the Merchant Card and Third-Party Payments form. The new form is required for reportable payment transactions – those funds merchants collect via a third-party payment network, such as credit and debit cards. 

Many people who list items through these retailers pay them a small fee and earn a profit selling merchandise around the world. Until now, the money collected by the online services hasn’t been disclosed to any taxing authorities, so some businesses may have neglected to report all of their taxable income from these sales.

Because this revenue is generally paid by credit card, PayPal funds or electronic funds transferred through big banking retailers, the accounting of these sales can be easily tracked…and reported to the IRS, hence the 1099-K form.

If the “PayPal Reporting Form” applies to you, now is the time to plan, reconcile and report income, especially those taxpayers accustomed to making rough estimates instead of using exact numbers. Many people may find what they thought was a tax-free hobby has in fact become a taxable small business. Thus you will need to account for those offsetting deductions to minimize your net taxable income. Very small operations will still get some relief, as the reporting threshold is cumulative payments of $20,000 or greater in a year before each merchant services company must report the income to you.

While the likelihood of total income exactly matching the total of these 1099-K’s is slim, the report will still give the IRS a range to work within for its new enforcement initiative. Businesses will be encouraged to report income from these third party payment networks, since repercussions exist if caught with unreported income, especially those merchants who may have been careless about their bookkeeping in the past.

Get in touch with us if we can assist you with tax planning, or if you will need a CPA for your 2011 tax preparation.  You can reach us at Office@CPAsite.com or by phone at (904) 396-5400.

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