PayPal 1099: How to Report Self-Employment Income to the IRS

Do you have to report income earned through PayPal to the IRS?

You must report income to the IRS, including payments from customers via PayPal. If you don’t report your income, the IRS can consider it under-reported income, and you may get hit with additional taxes and fees. 

In fact, if you sell over a certain amount, then PayPal will automatically report these payments. That’s because IRS Section 6050W states that payment processors — like PayPal — are responsible for reporting information about customers who receive payments for goods and services. 

How much do you have to sell on PayPal to receive a 1099?

If your annual sales on PayPal are relatively low, there’s a chance you won’t receive a 1099. And if your yearly income from a particular client falls below $600, that client may not send you a 1099. 

But whether you receive a 1099 or not, you’re responsible for reporting any income you earn on your taxes. Any money you earn is considered taxable, regardless of whether or not you receive a 1099 in the mail.

If your gross income falls below $600 in a calendar year, you’ll file the 1099-NEC on your own. The 1099-NEC is a form used to report self-employment income. 

How does PayPal track my income?

PayPal tracks the gross sales transactions of each account for a calendar year. Previously, PayPal only reported your income to the IRS if you earned more than $20,000 from selling goods and services and exceeded 200 separate transactions.

However, the reporting requirements changed on Jan. 1, 2023. The new requirements lowered the threshold from $20,000 to $600 in reported income for the sale of goods and services.

If you exceed the minimum income requirements, PayPal may contact you and ask for your Social Security number or Employer Identification Number (EIN). From there, the company should send you a copy of a 1099-K by Jan. 31. 

What is a 1099-K? 

Form 1099-K is a form you’ll fill out and submit with your tax returns. Third-party payment processors — like PayPal — must send a 1099-K to merchants who meet the reporting requirements. 

Here is the information you can expect to include on a 1099-K: 

• Your name, address and contact information
• Your tax identification number (TIN)
• The payee’s TIN
• The payee’s name, address and contact information
• Gross amount of payment transactions
• Total number of payment transactions
• The merchant category code
• Income earned by the month
• The state and state identification number
• State income taxes withheld
• Federal income taxes withheld

What is the difference between a 1099-NEC and a 1099-K?

Self-employment has many benefits but can make tax season more confusing. It can be difficult to understand the different forms you’re required to fill out to comply with IRS regulations.

If you regularly use a service like PayPal, you may hear about forms 1099-NEC and 1099-K. The IRS released Form 1099-NEC in 2020, replacing Form 1099-MISC. This form is specifically designed for freelancers and consultants.

If your small business earns more than $600 a year from a particular client, you can expect to receive a 1099-NEC from that company. And if you make more than $600 in gross annual sales through a third-party payment processor, like PayPal, you’ll also receive a 1099-K.

These forms are required because, unlike W-2 employees, self-employed individuals can claim business deductions, which lowers their taxable income. 

Taking deductions against PayPal and 1099 income

You can deduct business-related expenses from your annual income if you file a Schedule C. You can file expenses regardless of how much you earned the previous year. 

You can also deduct your expenses if you were actively engaged in business activities and didn’t earn any income. Each eligible expense just has to be considered an ordinary and necessary expense by the IRS.

An ordinary expense is something that’s common in your industry. A necessary expense is something helpful for your type of business. These are some of the most common business expenses that are fully tax deductible:

• Accounting fees
• Third-party payment processing fees
• Marketing and advertising costs
• Continuing education expenses
• Payments to contract workers
• Payroll expenses
• Software subscriptions
• Domain names and website hosting
• Legal fees
• Rent 
• Office equipment

Exceptions to consider

The IRS does specify that three types of expenses must be categorized separately from other expenses. You must separately track the cost of goods sold, capital expenses and personal expenses that fall into the categories below:

• Cost of goods sold: Cost of goods sold is any expense related to manufacturing your product. This includes expenses for raw materials, storage or labor costs. 
• Capital expenses: Capital expenses are the money you spend to buy, maintain or improve your company’s assets — such as equipment or rental property.
• Personal expenses: Personal expenses are not related to your business. For instance, paying to go on vacation with your family is considered a personal expense. 

How to go about filing your PayPal income

Once you have your 1099 forms, you’re ready to file your PayPal income. Here are three steps you’ll take to file your income taxes:

Determine your gross income

Start by gathering your 1099-K, 1099-NECs, and bank statements to determine your gross income for the year. Don’t forget to include payments from other clients that paid you less than $600 for the year. You may not have received a 1099-NEC, but you still have to pay income taxes on the money earned.

Figure out your deductions

Next, you’ll list any expenses you can deduct to lower your taxable income. For example, a home office deduction, marketing expenses, and business-related travel are common write-offs for business owners. 

Fill out Schedule C

Finally, you’ll fill out Schedule C to report your deductions and determine your taxable income for the year. Schedule C is the form used to report self-employment income on your tax returns. Make sure you pay your taxes on time so you don’t get hit with any late penalties or fees. 

Using accounting software to track PayPal income

Tracking and filing your new business’s PayPal income is pretty straightforward. But as your company expands, it will become more complex and your transactions will be more difficult to track. 

That’s why it can be helpful to start using accounting software to manage your income and expenses right from the beginning. Here’s a look at some accounting software to consider.

QuickBooks

QuickBooks is one of the most popular options available, and it’s our pick as the best accounting software for your growing business. Learn more in our review of QuickBooks. One of the best things about the software is that it’s scalable.

The company offers four different plans, along with a variety of add-on services. It uses double-entry accounting and offers comprehensive reporting features. However, QuickBooks does come with a bit of a learning curve, especially if you’re unfamiliar with fundamental accounting principles. 

Xero

Xero, cloud-based accounting software, is one of the best options for expanding businesses. Read our full review of Xero for more information. One of the unique things about Xero is that it allows account holders to add an unlimited number of users, regardless of their pricing tier. This can make Xero more affordable than other types of accounting software on the market.

Xero uses double-entry accounting, which allows you to create various financial reports. You can also use the software to send online quotes, invoices and automatic payment reminders. 

FreshBooks

FreshBooks is accounting software designed for customers with little accounting knowledge. Learn more in our FreshBooks review. The software is intuitive, easy to use, and offers all the basic functionality for your business. 

FreshBooks allows you to send invoices, track your expenses and record payments. It also allows you to track your time and send client estimates. Additionally, the software integrates with nearly 100 different apps.

Zoho Books

Zoho Books is one of the best options available for your small business, whether you are solo or have just a few employees. Read our review of Zoho Books for more information. You can use the software to keep track of all your outstanding invoices and collect customer payments.

Zoho Books lets you send invoices and automated payment reminders. You can also use the software to track and manage inventory.

Zoho Books is part of the Zoho productivity suite. One of its accounting software features is managing the details of individual client projects. You can schedule tasks and timelines from the app, which offers convenience and efficiency.

Filing your PayPal income is easy 

If you earn money through PayPal from the sale of products or services, you’re expected to report that income to the IRS. One of the most important things you can do is stay on top of your company’s income and expenses from the beginning. Accounting software will help you avoid many accounting mistakes by connecting you directly to your business checking account. 

Accounting software helps accurately categorize your expenses and keep track of customer payments. You can also give your accountant access so you’ll be prepared come tax season.