NEW TAX LAW FOR ONLINE SELLERS
Everything you need to know about IRC Section 6050W
Internal Revenue Code (IRC) Section 6050W states that all US payment processors, including PayPal, are required by the Internal Revenue Service (IRS) to provide information to the IRS about certain customers who receive payments for the sale of goods or services through PayPal. PayPal is required to report gross payments received for sellers who receive over $20,000 in gross payment volume AND over 200 separate payments in a calendar year. In order to help you understand these changes, we have prepared the following FAQs.
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- What is Internal Revenue Code (IRC) Section 6050W?
Under the legislation, we'll report to the IRS the total payment volume received by US account holders whose payments exceed both of these levels in a calendar year:
- US$20,000 in gross payment volume from sales of goods or services in a single year
- 200 separate payments for goods or services in the same year
IRC Section 6050W applies to all payment processors, including PayPal. Our goal is to help PayPal sellers understand and comply with the new requirements.
- How will I know if IRC Section 6050W affects me?
PayPal will track the payment volume of your account(s) to check whether your payment volume exceeds both of these levels in a calendar year:
- $20,000 USD in gross payment volume from sales of goods or services in a single year
- 200 payments for goods or services in the same year
You may be asked to add your tax ID number, such as a Social Security Number (SSN) or Employer Identification Number (EIN), to your existing account(s), if you don’t already have one on file.
If you cross the IRS thresholds in 2012, PayPal will send Form 1099-K to you and the IRS for the 2012 tax year in early 2013.
- What does PayPal need from me as a result of the IRS changes?
PayPal will ask affected sellers to update their account(s) by providing a tax ID number, if they don't already have one on file. Your tax ID number is one of these:
- Your Social Security Number (SSN)
- Your Employer Identification Number (EIN)
- Your Individual Tax Identification Number (ITIN)
Please use the guidelines below to determine which tax ID number to provide. You should use the tax ID number that you use when reporting any taxable income related to your PayPal activity to the IRS.
Business Entities with an EIN
If you operate through a business legal entity such as a corporation or partnership you will need to provide your company EIN and company name.
Sole Proprietors with an EIN
If you operate as a sole proprietor using an EIN you will need to provide your company EIN and your own name. Do not provide a business name or a DBA name ("Doing Business As") with your EIN.
Individual Sellers and Sole Proprietors without an EIN
If you are an individual seller or sole proprietor and operate under your SSN or ITIN you will need to provide your SSN or ITIN and your name. Do not provide a business name or DBA name with your SSN or ITIN.
PayPal will also ask affected sellers to confirm that their account name matches the tax ID number provided and to confirm their physical address so that if Form 1099-K is issued, we can report your information accurately to the IRS.
If you are asked to update your information, PayPal will notify you via email, alert you when you log into the PayPal site, and display an alert in your Account Overview.
- What happens if I don’t provide my tax ID number?
If you do not provide your tax ID number (Social Security Number (SSN), Employer Identification Number (EIN), or Individual Tax Identification Number (ITIN)) after we've requested it, we may place the following limitations on your account:
- You’ll be unable to receive funds into your account.
- You won’t be able to close your account.
The limitations will be removed after your provide your tax ID number.
- How is the $20,000 calculated? Will it be calculated based on net or gross transaction earnings?
As required by IRC 6050W, the $20,000 will be calculated by looking at a seller’s gross payment volume for sales of goods or services. Gross amount means that any adjustments for credits, cash equivalents, discounts, fees, refunded amounts or any other amounts will not be netted out.
In addition, the reported amount will include any shipping and handling, sales tax or other fees which are included in payments you receive. We realize that these amounts may or may not be included in your taxable income, but we are required to report them. You should work with your tax advisor to determine how these items should be treated for tax purposes.
- Are personal payments that I receive counted in the total that will be reported to the IRS?
No. Personal payments that are not payments for the sale of goods or services will not be counted when determining if the IRS thresholds have been reached and will not be included on your Form 1099-K if you exceed the thresholds. However, all payments received for the sale of goods or services will be used to calculate the gross payment volume to be reported. PayPal monitors accounts to ensure that personal payments are not being used for sales of goods and services.
- If I have multiple accounts that, when combined, meet the thresholds, but individually they don’t, will my accounts be affected?
Yes. PayPal and all other payment processors are required to determine if the IRS thresholds have been met and, if so, to report payment volume to the IRS by tax ID number such as a Social Security Number (SSN), or Employer Identification Number (EIN).
For example, if two accounts have the same tax ID number on file and have the payment levels shown below, PayPal will report both accounts on separate 1099-K Forms under the new regulation.
- Account A - $18,000 in payments received for goods or services and 180 transactions
- Account B - $3,000 in payments received for goods or services and 30 transactions
- Will I be affected by the 2011 tax changes if I only meet one of the thresholds?
No. A seller has to exceed both IRS thresholds ($20,000 in gross payment volume and 200 separate payments) in a calendar year before a Form 1099-K is required. We may require that you provide a tax identification number before you reach these thresholds however we will only report your payments if you exceed both thresholds.
- Are non-profit organizations affected by IRC Section 6050W?
For purposes of IRC Section 6050W, non-profit organizations are treated the same as for-profit organizations. Non-profit organizations may be required to submit their Tax Identification Number (TIN). A Form 1099-K will be sent to non-profit organizations that exceed the thresholds for sales of goods or services.
- Are non-US PayPal accounts affected by this law?
Internal Revenue Code Section 6050W requires PayPal's non-US subsidiaries to comply with the new law. As a result, non-US account holders may need to certify their non-US status and their address. US sellers using a non-US PayPal account may be required to provide a tax ID number (Social Security Number (SSN), Employer Identification Number (EIN), or Individual Tax Identification Number (ITIN)) for those accounts. If you have an account with one of PayPal's foreign affiliates you may be contacted to certify your non-US status or provide a US Tax Identification Number (TIN).
- Will I need to upgrade to a business account?
If you have a Personal or Premier account and you provide an Employer Identification Number (EIN) to PayPal, you will be asked to upgrade to a Business account. If you have a Personal or Premier account and you provide a Social Security Number (SSN) to PayPal, you will not be asked to upgrade to a Business account.
- Will all sellers receive a Form 1099-K?
No. Only sellers who exceed the IRS thresholds will receive Form 1099-K. Sellers exceed the IRS thresholds when they receive over $20,000 USD in gross payment volume for the sale of goods or services AND receive over 200 separate payments for goods or services in the same calendar year.
- I didn't receive a Form 1099-K and thought I was supposed to. What should I do?
If you feel you crossed the thresholds for reporting and did not receive a Form 1099-K from PayPal:
- Log in to your PayPal account.
- Click History.
- Select Tax Documents from the drop-down.
If a Form 1099-K was issued for your account, it will be listed here and available to download or print. If a Form 1099-K is not listed, and you still feel like you should have one, contact PayPal for assistance.
- How do I read Form 1099-K?
PayPal is working with its sellers to help them understand the new requirements. Please refer to the links section on this site for more information on the process and forms. Also, check back often for future information updates on this site.
- How does PayPal calculate the dollar amount shown on the Form 1099-K?
The dollar amount shown on the Form 1099-K is your total gross sales for goods or services that were received through PayPal for the previous calendar year. As required by the IRS, this amount includes all fees and/or payments associated with your sales, including shipping fees or sales tax received.
As the dollar amount on your Form 1099-K is a gross amount, any adjustments for credits, cash equivalents, discounts, fees, refunded amounts or any other amounts will not be netted out.
- How do I get a reconciliation report from PayPal?
To get a reconciliation report that shows all of the transactions PayPal has included in the dollar amount reflected on your Form 1099-K:
- Log in to your PayPal account.
- Click History.
- Select Reports from the drop-down.
- Click Financial Summary for the year you are interested in and download the report.
- Why did I receive more than one Form 1099-K from PayPal?
PayPal and all other payment processors are required to report sales and transaction volume to the IRS by tax ID number. We will prepare Form 1099-K at the PayPal account level. If you have multiple accounts, that either individually or when combined, cross the IRS thresholds, you will receive a Form 1099-K for each account associated with your tax ID number.
- What if I have questions about my Form 1099-K?
If you have questions about your Form 1099-K, please review all of the information on this site. PayPal is not qualified to give you specific tax guidance and asks that you contact a tax professional.
- What should I do if my Name or tax ID number is incorrect on my Form 1099-K?
To change the name listed on your Form 1099-K:
- Log in to your PayPal account.
- Go to the Profile Section.
- Click Change next to your Name to change your name.
- Click Change next to Business Information to change your business name.
- In the description field, please include your request for a corrected Form 1099-K.
To change the tax ID number on your Form 1099-K, call PayPal using the telephone number provided on your Form 1099-K for assistance.
- What should I do if I feel the dollar amount shown on my Form 1099-K is incorrect?
If you feel the dollar amount on your Form 1099-K is incorrect, you can access a reconciliation report for your accounts on the Tax Documents section of the website.
If the dollar amount seems high, note that:
- Shipping charges and sales tax are included in the total.
- Refunds and returns have NOT been excluded from the total.
If the dollar amount seems low, note that:
- It only includes gross sales for good or services that were processed through your PayPal account.
- Transactions processed after December 31st are NOT included on the prior year’s Form 1099-K, but will be reflected in the next year’s Form 1099-K.
- We only report your PayPal activity. Other payment methods are not included.
If you feel a correction is needed to your Form 1099-K, contact us for assistance using the telephone number provided on your Form 1099-K.
- Do I have to report the amounts from Form 1099-K on my tax return?
Please consult your tax advisor or the IRS for additional information on how the amounts reported on Form 1099-K should be reflected on your tax returns.
- Will PayPal help me with my tax return?
While we're committed to helping our customers understand the tax changes, PayPal is not qualified to give you specific tax guidance. Please contact a tax professional.
- Will PayPal provide any information to any State tax authorities?
Yes. We will provide copies of Form 1099-K to certain states as required. The final list of states that require PayPal to file Form 1099-K will not be final until March 2013. In addition, states generally have the ability to obtain data from the IRS.
- Does PayPal have any merchants or partners that offer solutions or services to help me deal with my 1099-K?
Yes. Outright, a free bookkeeping and tax application for online sellers, can help you understand the amounts on your 1099-K, deduct all of your expenses and prep your Schedule C. Learn more about Outright and sign up.
Disclaimer: "PayPal's presentation of Outright.com is not an endorsement of the website or of any goods or services offered on the website. PayPal is not responsible for any errors or misrepresentations in information provided by or contained within Outright.com. PayPal is not responsible for any erroneous or inaccurate tax advice or any other advice provided by Outright.com. PayPal is under no obligation to monitor the accuracy of Outright.com."
- Is my personal information safe with PayPal?
Yes. PayPal automatically encrypts your confidential information in transit from your computer to ours using the Secure Sockets Layer protocol (SSL) with an encryption key length of 128 bits (the highest level commercially available). Before you even register or log in to our site, our server checks that you’re using an approved browser – one that uses SSL 3.0 or higher.
Once your information reaches us, it resides on a server that is heavily guarded, both physically and electronically. Our servers sit behind an electronic firewall and are never directly connected to the Internet, so your private information stays private.
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