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Author Topic: PayPal and the new IRS tax law  (Read 11129 times)

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« on: February 15, 2011, 10:12 »
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So is anyone else concerned enough to be thinking of a strategy on dealing with the new tax code affecting PayPal payments?  Just as a refresher:

Under the new legislation, PayPal will be required to report to the IRS the total payment volume received by PayPal customers in the US who:

    *   Receive more than $20,000 in gross payment volume from sales of goods or services in a single year, AND
    *   Receive over 200 payments in a single year.


PayPal's information page here:
https://cms.paypal.com/us/cgi-bin/marketingweb?cmd=_render-content&content_ID=marketing_us%2FIRS6050W

So what's the big deal?  We get 1099s from the agencies already, so we're not having to pay additional taxes, right?  I think I'd rather not have to deal with yet another 1099.

I'm already requesting fewer payouts in 2011, not because I'm making less but to stay under the 200-payment trigger point.  If I just request payouts twice a month from the big agencies (of course, SS and 123RF will only send once a month), and just one payout a month from the smaller agencies, I should stay under the 200-payment threshold and not have to worry about triggering 1099s from PayPal. 

Anyone else thinking this way?


« Reply #1 on: February 15, 2011, 10:16 »
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You could combine paypal payments with other payment methods, payoneer or moneybrokers, etc.

helix7

« Reply #2 on: February 15, 2011, 10:52 »
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...I'm already requesting fewer payouts in 2011, not because I'm making less but to stay under the 200-payment trigger point.  If I just request payouts twice a month from the big agencies (of course, SS and 123RF will only send once a month), and just one payout a month from the smaller agencies, I should stay under the 200-payment threshold and not have to worry about triggering 1099s from PayPal. 

Anyone else thinking this way?

That's exactly what I'm doing. I can't do much about the $20k trigger but I do have some control over payout requests and how often I make them, at least at the sites that allow you to make requests and don't auto-pay.

My bigger issue with this is that I use my PayPal account for business and personal use. I occasionally sell things on ebay, not for income but just to get rid of the random old item around the house that has some value. So now when I sell an old book or DVD, that money gets lumped in with my other PayPal income. Seems like an added layer of confusion for my accountant.

I'm thinking maybe I should have separate personal and business PayPal accounts.

« Reply #3 on: February 15, 2011, 10:59 »
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Luckily we dont sell goods or services...

velocicarpo

« Reply #4 on: February 15, 2011, 11:14 »
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If you have a higher sales volume I would recommend installing an offshore company in Panama, or if it is needed for legal requirements, in the UK, Seychelles etc. and you are tax free.
Especially in Panama where you don`t have any book keeping requirements and costs are minimal. You may have Problems with installing an Paypal account though in Panama (but not with an UK limited)...

It all depends on your sales volume and business strategy.

« Reply #5 on: February 15, 2011, 11:25 »
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Luckily we dont sell goods or services...

Maybe I missed something.  Are our commissions considered "royalties" making us exempt from the whole PayPal 1099 issue?

« Reply #6 on: February 15, 2011, 11:48 »
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    *   Receive more than $20,000 in gross payment volume from sales of goods or services in a single year, AND
    *   Receive over 200 payments in a single year.[/b]


I thought it was both $20,000 and 200 (combined) payments in a single year? So if you had 201 payments but made $19,999.99 you would still be exempt from the 1099.

« Reply #7 on: February 15, 2011, 12:02 »
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    *   Receive more than $20,000 in gross payment volume from sales of goods or services in a single year, AND
    *   Receive over 200 payments in a single year.[/b]


I thought it was both $20,000 and 200 (combined) payments in a single year? So if you had 201 payments but made $19,999.99 you would still be exempt from the 1099.

That is correct.  So if you make more than $20,000 and would normally receive more than 200 payments (both happened to me in 2010) you would be affected by the change.

Of course, I'm still trying to verify if we're even covered by this... are we being paid for "goods or services?" or are the "royalties" we receive something different?  I sent an email to PayPal asking if microstock payments are covered by the change.

« Reply #8 on: February 15, 2011, 12:05 »
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As I understand it, you shouldn't have to pay any more taxes no matter what (unless you haven't been paying taxes on this income before). The whole idea is to catch people who make serious money through paypal but don't pay any taxes on it.

Still, it is more likely to raise an audit flag and be an accounting mess and if you are close to the threshold it might be worth juggling things a bit to avoid it.

lisafx

« Reply #9 on: February 15, 2011, 12:30 »
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Yeah, the accounting mess is what I am concerned about.  I keep track of (and pay taxes on) all my income, but because we get 1099s from most of the big agencies already, the paypal 1099 will be redundant.  And yes, it does seem like an invitation to an audit. 

I have made a schedule for myself of when to request from the various agencies.  If I follow it, I should be somewhere in the 150 area for payout requests.  I have also switched some payments to Moneybookers instead of Paypal. 

When I started my site, I was concerned that any payments from there might push me over the 200 threshold, so I started a separate business paypal account for website payments.  If I sell any gear I will also put them through the business account. 

Maybe I missed something.  Are our commissions considered "royalties" making us exempt from the whole PayPal 1099 issue?


If you are still actively working to produce stock images, then your "royalties" are considered business income.  It's explained very well here:
http://www.completetax.com/taxguide/text/c60s10d516.asp

Relevant portion:
However, if you are in business as a self-employed artist, author, photographer or inventor, and the royalties relate to a self-created copyright, trademark, or patent, you would report the payments as part of your business income on Schedule C.

« Reply #10 on: February 15, 2011, 12:33 »
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Luckily we dont sell goods or services...

Maybe I missed something.  Are our commissions considered "royalties" making us exempt from the whole PayPal 1099 issue?

When I go to paypal, under the send money tab, I can choose "Purchase" which includes options for goods or services, or I can choose "Personal".  Since incoming payments are not "purchases", I assume they fall under the "Personal" - > "Payment Owed" category.

Technically speaking, I guess.

« Reply #11 on: February 15, 2011, 12:48 »
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Luckily we dont sell goods or services...

Maybe I missed something.  Are our commissions considered "royalties" making us exempt from the whole PayPal 1099 issue?

When I go to paypal, under the send money tab, I can choose "Purchase" which includes options for goods or services, or I can choose "Personal".  Since incoming payments are not "purchases", I assume they fall under the "Personal" - > "Payment Owed" category.

Technically speaking, I guess.

Interesting... so it may boil down to how the microstock agencies classify the payments they're sending to us.  I can't imagine they're setting these up as payments for goods and services, as Sean points out.  Hopefully when PayPal answers my question they can shed some light on how the payments I've been receiving are categorized.  (I just looked at some recent payments and could see no indication of category.)  I'll write back with what I hear.

RacePhoto

« Reply #12 on: February 16, 2011, 01:01 »
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I'm thinking maybe I should have separate personal and business PayPal accounts.

I do and have for a long time. Also a business and personal checking accounts to prevent co-mingling of funds. Drove my accountant nuts until I divided things. Each PayPal account needs a distinctive bank account. You can't have two PP going to one Bank account.

Back when PP had fees for business and free for personal, it was always a good thing.

Yes, I can read the word AND?

    *   Receive more than $20,000 in gross payment volume from sales of goods or services in a single year, AND
    *   Receive over 200 payments in a single year.

I'd say it means you have to do BOTH.
« Last Edit: February 16, 2011, 01:03 by RacePhoto »

« Reply #13 on: February 16, 2011, 08:07 »
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Interesting... so it may boil down to how the microstock agencies classify the payments they're sending to us.  I can't imagine they're setting these up as payments for goods and services, as Sean points out.  Hopefully when PayPal answers my question they can shed some light on how the payments I've been receiving are categorized.  (I just looked at some recent payments and could see no indication of category.)  I'll write back with what I hear.

UPDATE:

Got this message from PayPal support: "If these payments get sent to you as a good or a service then this would
apply to you. If these payments get sent to you as a personal payment
then this would not apply to you."

So it does boil down to how the agencies classify the payments when sent.  To any agency personnel reading this post... can you please respond with an explanation of how you classify the payments you send to us?  Thanks!

« Reply #14 on: February 16, 2011, 08:11 »
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I classify it as a payment.  They are not paying me for either goods or services.

« Reply #15 on: February 16, 2011, 11:28 »
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I don't see what the big fuss is here. We are selling nothing to PayPal. It's a simple transfer of funds, much like a bank transfer. I guess we just hope that the IRS will not "double bill" us.

Disclaimer: I am not a CPA but I often play one for microstock shoots.

Roadrunner

  • Roadrunner
« Reply #16 on: February 16, 2011, 11:34 »
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Unfortunately IRS is not going to get involved with ACCURACY.  It is easier for the agents to assume that the total business Income is the AGGREGATE of all 1099's submitted.  This is based on thgeir training - "All income is taxable unless otherwise provided for."  This is in accordance with IRC. Section 61 A.  A $20,000 lump sumn payout will show up on the Currency Transaction Report reviewed by their Special Enforcement Agents.  On the other hand, if you receive 20 payouts from agencies of $1,000 each, and they issue 1099s, then all that income should be reported according to IRS.  If Pay Pal issues a 1099 for the same $20,000, I doubt if IRS will deduct any of the other other 1099s from that amount.

Just make sure you attach a schedule showing the Income that is taxable based on the individual 1099s issued by each MS site and how the Pay Pal 1099 was a duplicate issue.  I am sad to tell you that hte Officials at the top of the IRS and the Treasury are incompetent.  Did you know that the Goverment can not account for 25% of its income? Also bear in mind who calls the shots - Charley Rangle and others.

At any rate your accountant should be aware of the duplication in reporting income by the source of the income as well as PAay Pal,  Bingo!  Do you think the Banks will also be issuing 1099s for the deposits people make in addition to the Interest earned?  To me PAY Pal is a form of banking service!


lisafx

« Reply #17 on: February 16, 2011, 11:59 »
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Unfortunately IRS is not going to get involved with ACCURACY.  It is easier for the agents to assume that the total business Income is the AGGREGATE of all 1099's submitted.  This is based on thgeir training - "All income is taxable unless otherwise provided for."  This is in accordance with IRC. Section 61 A.  A $20,000 lump sumn payout will show up on the Currency Transaction Report reviewed by their Special Enforcement Agents.  On the other hand, if you receive 20 payouts from agencies of $1,000 each, and they issue 1099s, then all that income should be reported according to IRS.  If Pay Pal issues a 1099 for the same $20,000, I doubt if IRS will deduct any of the other other 1099s from that amount.


Yes, this is exactly the issue.  Double billing and the difficulty of sorting it out. 

« Reply #18 on: February 16, 2011, 17:13 »
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I don't see what the fuss is either .. the only reason one should be bothered by the form is if they're involved in tax evasion  .. that's the only people this will have an effect on. If you want to evade some taxes do it the right way and start using your camera for cash. LOL

« Reply #19 on: February 16, 2011, 17:38 »
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Of course this is aimed at the tax evaders. Ebay/PayPal has to be the largest engine driving the black market in tax-free income. The IRS is probably doing a good thing in trying to collect in this manner, despite the bookkeeping problems for law-abiders like us folks. If the IRS could also monitor income flowing through flea markets, garage sales, and Craigslist they would do so. My pessimistic outlook foresees an Orwellian cash-less society (plastic only) where ALL transactions are tracked.

helix7

« Reply #20 on: February 16, 2011, 17:58 »
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I do and have for a long time. Also a business and personal checking accounts to prevent co-mingling of funds. Drove my accountant nuts until I divided things. Each PayPal account needs a distinctive bank account. You can't have two PP going to one Bank account...

Logging in to PayPal right now to separate out the accounts. I have separate personal and business checking accounts anyway, so it stands to reason that I would have separate PayPal accounts. Now is as good a time as any to make the change.

lisafx

« Reply #21 on: February 16, 2011, 18:18 »
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I don't see what the fuss is either .. the only reason one should be bothered by the form is if they're involved in tax evasion  .. that's the only people this will have an effect on. If you want to evade some taxes do it the right way and start using your camera for cash. LOL

Do you fall into the category that will get double 1099's on the same money?  Meaning do you collect over 200 payments and over 20k from paypal annually?  If not, this doesn't affect you, so I can see why you wouldn't understand what the fuss is about. 

« Reply #22 on: February 16, 2011, 18:51 »
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Luckily we dont sell goods or services...

Maybe I missed something.  Are our commissions considered "royalties" making us exempt from the whole PayPal 1099 issue?

The 1099s I receive from all the stock agencies puts the income I have received in the royalties box, so I'm going to say that yes, they are considered royalties.

In fact, this year, I got three 1099s from Shutterstock. The first one had money showing in box 7, nonemployee compensation. I knew something was messed up because the dollar amount was about a tenth of what it should have been. Then I received another one, with the same amount, with a note enclosed saying they messed up and put the amount in the wrong box. This time the amount was added to the royalties box 2. Also enclosed was a third one, with the correct amount I actually made last year.

Not goods and services, for sure.

« Reply #23 on: February 16, 2011, 22:41 »
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I don't see what the fuss is either .. the only reason one should be bothered by the form is if they're involved in tax evasion  .. that's the only people this will have an effect on. If you want to evade some taxes do it the right way and start using your camera for cash. LOL

Do you fall into the category that will get double 1099's on the same money?  Meaning do you collect over 200 payments and over 20k from paypal annually?  If not, this doesn't affect you, so I can see why you wouldn't understand what the fuss is about. 

yeah I'll be doing the paperwork so it effects me but my income streams are also not limited to only paypal. I'm also keeping books on who pays with cash, who pays by check, who pays by credit card, who is on a payment plan, who is in our rewards program, what rewards are due, federal tax, state tax, sales tax, use tax, etc. .. so in the course of operating a photography business what's the big deal with one more form every year. It's one very tiny form and it's not effecting my income so who cares.

The only tax related complaints I have is on how slow it is for all the agencies to get the paperwork out. All my income and expenses for my studio were tracked, filed and ready to go Dec. 31. Today is Feb 16 and have I completed all of my responsibilities? No because I'm waiting on the micro portion of it to all get here. That's more annoying to me than the government trying to fight back against tax evaders.


 

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