PayPal Change

[Mike Henderson]

I received a notice from PayPal that I need to give them my social security number for tax purposes. The reason is that if I sell more than $600 of things in a year, they will do a 1099 on me. This only applies to things sold as "merchandise", it does not apply to money transferred between friends (what many people call "Friends and Family").

The problem with getting a 1099 is that you then have to deal with it in your tax return. If you sold a tool for less than you paid for it, there would be no "income" for tax purposes. But, technically, you have to have a record of what you bought it for, and that increases the record keeping problem. We would now have to keep receipts for anything we might sell in the future.

You can avoid the problem by using other payment techniques: You can require cash for any in-person sales or you could have have a person send you a check.

Personally, I don't want to have to deal with making sure I keep records of everything I bought in the past and will just not sell with PayPal payment in the future.

Has anyone else heard of this? Any accountants have any comments about the tax issue?

I think this was done to force people who essentially run a business using PayPal payment to report their income but it could affect all of us.

Mike

[Here's something (https://newsroom.paypal-corp.com/2021-11-04-New-US-Tax-Reporting-Requirements-Your-Questions-Answered)from PayPal about this.]
[Here's another source.] (https://stepanchukcpa.com/paypal-changes-you-should-know-about/)

[Brian Holcombe]

It’s done because the laws around this kind of thing are tightening and they likely want to be ahead of the curve to avoid being aggressively fined. I already keep a record of everything and have for years, so no change for me but you can expect more of this to continue happening.

[Lisa Starr]

It is just a company that is trying to be prudent. PayPal doesn't want to pay penalties, which is just good business. As the US government tries to increase revenue, more and more monetary transactions will be reportable. My sister and her husband have a little side business with many transactions utilizing PayPal. Per their accountants advice, they keep good records of the costs of the items when they purchase them and report the gains from their activities each year. As the accountant said, "you don't want to be on the IRS's radar for a couple bucks in taxes".

[Brian Elfert]

A lot fewer people will be impacted than if EBay was still using Paypal for payments. Today, if you pay by Paypal on EBay the money actually goes into Ebay's Paypal account. EBay then deposits the money in the seller's bank account.

I have been accepting credit cards via Square. I may stop taking credit cards since I am 95% cash anyhow. There is a good chance I will be over $600 in 2022.

[roger wiegand]

Given that the congresscritters in their infinite wisdom have effectively stripped the IRS of the ability to audit all but the most egregious frauds, they are seriously not going to come after you for making a best guess on profits from a few hundred dollars in sales. Worst case you have to pay up and are out a few 10's of dollars. The 1099 requirement at least keeps the slimeballs who are making 10's or 100,000's in sales and profit and not reporting it at least subject themselves to the possibility of an evasion charge, not that that's likely in the current environment.

Nearly 40 years of dutifully reporting a few hundred or thousands of dollars in hobby income and zeroing out with expenses incurred in the process has not produced even one raised eyebrow.

[Zachary Hoyt]

Most of my income comes through PayPal, and I imagine they must have had my SSN for some time, though I can't recall. All of my transactions are written in my day-book, so I have pretty good records if I was to get audited, though it would be hard to put everything together. For instance a banjo has several dozen small metal parts, most of which I buy from three or four sources but I make a few of them myself. Then there is the wood which may be from different places depending what the particular instrument has, so there are multiple cost amounts for each item sold, and each purchase of materials gets used in multiple banjos. Luckily I have pictures of each banjo so I can show just what went where. I pay income and self-employment taxes on my sales, but the record keeping is a bit time consuming and messy.

[Brian Tymchak]

Nearly 40 years of dutifully reporting a few hundred or thousands of dollars in hobby income and zeroing out with expenses incurred in the process has not produced even one raised eyebrow.

Those congress critters took away the ability to claim expenses against hobby income in the 2017 tax act.

[Perry Hilbert Jr]

30 years ago, I heard Pat Robertson ranting about how the government wats to do away with cash to cut down on tax cheats and illegal businesses. I thought he was nuts then. Gotta reconsider not. My service club is getting a square to accept payments for Chicken BBQ, bingo, etc. So many people do not carry cash with them today. I understand that in many some countries, it is actually impossible to pay most bills by cash and even checks are becoming obsolete and electronic payments are almost universal. From that view point, many think the US is technologically backward..

[Jim Koepke]

Personally, I don't want to have to deal with making sure I keep records of everything I bought in the past and will just not sell with PayPal payment in the future.

PayPal has been collecting sales tax for a couple years now. The fed just wants their share of the action.

I'm not worried about every penny and am not a big fan of taxes but two things in life are certain…

Many of my tools and things have been recorded somewhere, especially items bought with an eye towards reselling them. To me it isn't something to worry about. My tools are not being listed on a depreciation schedule, there isn't a recapture problem. Will the IRS take anyone to court on the grounds they believe they happened to get every one of their tools they sold for nothing?


Those congress critters took away the ability to claim expenses against hobby income in the 2017 tax act.

The simple way around that is to get a business license. Of course if one keeps losing money after so many years they may decide it is a hobby.


[edited]
I understand that in many some countries, it is actually impossible to pay most bills by cash and even checks are becoming obsolete and electronic payments are almost universal. From that view point, many think the US is technologically backward..

Part of the full faith and credit of the government is the pieces of paper they issue are legal for all debts public and private. It will be a while before we can do away with cash payment.

jtk

[Brian Holcombe]

Not sure I believe that, Jim. I was turned away from buying coffee with cash yesterday.

WRT hobby income, please see this:

https://www.irs.gov/newsroom/five-things-to-remember-about-hobby-income-and-expenses

[Curt Harms]

I've wondered about Ebay collecting sales tax. SWMBO has gone round and round with them about charging sales tax on food items. She buys tea and supplements on Ebay. In Pennsylvania food is not subject to sales tax.

[Brian Tymchak]

WRT hobby income, please see this:

https://www.irs.gov/newsroom/five-things-to-remember-about-hobby-income-and-expenses

Wow, for a few minutes I was excited that what I had read previously was incorrect, but then realized that that page is dated November, 2017 and part of the historical archive. The 2017 tax act was signed in December, 2017 and in effect starting in 2018. If you dig down in the tax code a bit, there is this:


https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRcc67ec453a5e514/section-1.183-2

1.183-2 Activity not engaged in for profit defined.

(a) In general. For purposes of section 183 and the regulations thereunder, the term activity not engaged in for profit means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212. Deductions are allowable under section 162 for expenses of carrying on activities which constitute a trade or business of the taxpayer and under section 212 for expenses incurred in connection with activities engaged in for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Except as provided in section 183 and § 1.183-1, no deductions are allowable for expenses incurred in connection with activities which are not engaged in for profit. Thus, for example, deductions are not allowable under section 162 or 212 for activities which are carried on primarily as a sport, hobby, or for recreation. The determination whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case.



There were a few exceptions noted in yet another sub paragraph of a sub paragraph of a sub paragraph, etc, etc.... and I'm certainly not a tax expert, but I didn't see anything that would allow a typical woodworker hobbyist to deduct expenses against income.

Unless the law changes again, we're stuck with it until 2025 when the tax act expires.

[Brian Tymchak]

Those congress critters took away the ability to claim expenses against hobby income in the 2017 tax act.



The simple way around that is to get a business license. Of course if one keeps losing money after so many years they may decide it is a hobby.
jtk

True, although you carry the additional burden of self-employment taxes ( both sides of SS and FICA).

[Mike Henderson]

Wow, for a few minutes I was excited that what I had read previously was incorrect, but then realized that that page is dated November, 2017 and part of the historical archive. The 2017 tax act was signed in December, 2017 and in effect starting in 2018. If you dig down in the tax code a bit, there is this:
https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRcc67ec453a5e514/section-1.183-2

1.183-2 Activity not engaged in for profit defined.

(a) In general. For purposes of section 183 and the regulations thereunder, the term activity not engaged in for profit means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212. Deductions are allowable under section 162 for expenses of carrying on activities which constitute a trade or business of the taxpayer and under section 212 for expenses incurred in connection with activities engaged in for the production or collection of income or for the management, conservation, or maintenance of property held for the production of income. Except as provided in section 183 and § 1.183-1, no deductions are allowable for expenses incurred in connection with activities which are not engaged in for profit. Thus, for example, deductions are not allowable under section 162 or 212 for activities which are carried on primarily as a sport, hobby, or for recreation. The determination whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all of the facts and circumstances of each case.



There were a few exceptions noted in yet another sub paragraph of a sub paragraph of a sub paragraph, etc, etc.... and I'm certainly not a tax expert, but I didn't see anything that would allow a typical woodworker hobbyist to deduct expenses against income.

Unless the law changes again, we're stuck with it until 2025 when the tax act expires.

I can understand not allowing me to deduct the cost of things I purchase for a hobby. But what about if I sell something that I made? I'm not in business but I made a table for a friend and he paid me a fair price. Can I deduct the cost of materials and consumables? If he paid me by PayPal as merchandise and it was over $600 that will generate a 1099. And I have experience with missing a 1099. The IRS just sends you a bill for the tax on the amount you missed on that 1099. No audit - just a computer generated bill.

You'd have to have some way to offset that 1099 on your tax return.

But the best thing is just to avoid getting a 1099 in the first place.

Mike

[Mike Henderson]

A lot fewer people will be impacted than if EBay was still using Paypal for payments. Today, if you pay by Paypal on EBay the money actually goes into Ebay's Paypal account. EBay then deposits the money in the seller's bank account.

I have been accepting credit cards via Square. I may stop taking credit cards since I am 95% cash anyhow. There is a good chance I will be over $600 in 2022.

I expect that eBay will have to track the payments to you and generate the 1099. It's a payment for merchandise, and my reading of the requirements would indicate that they would have the same obligation as PayPal would.

If eBay gives you more than $600 for things you sold on eBay, no matter how the buyer paid for it, they will have to send you a 1099.

Mike

[It's very easy to exceed $600. A good camera, or a good lens, can go for $600 or more. And the test is the aggregate over the whole year. So even if one item didn't exceed $600, you may exceed it with the next item. This is going to affect a LOT of people who casually sell items they no longer want.]

[Brian Tymchak]

I can understand not allowing me to deduct the cost of things I purchase for a hobby. But what about if I sell something that I made? I'm not in business but I made a table for a friend and he paid me a fair price. Can I deduct the cost of materials and consumables? If he paid me by PayPal as merchandise and it was over $600 that will generate a 1099. And I have experience with missing a 1099. The IRS just sends you a bill for the tax on the amount you missed on that 1099. No audit - just a computer generated bill.

You'd have to have some way to offset that 1099 on your tax return.

But the best thing is just to avoid getting a 1099 in the first place.

Mike

I believe the short answer is no, you can't deduct those expenses. I think our only defense is to add the tax expense into the price charged for the piece.

I would assume that any payment to the IRS to cover a 1099 would be documented on your tax return, just like paying estimated taxes.

[Mike Henderson]

I believe the short answer is no, you can't deduct those expenses. I think our only defense is to add the tax expense into the price charged for the piece.

I would assume that any payment to the IRS to cover a 1099 would be documented on your tax return, just like paying estimated taxes.

That doesn't make business sense. If I can't deduct the cost of materials for making something, then I shouldn't be able to deduct the cost of purchasing something when I sell it.

I don't think it would be fair to tax someone on the full sale price of something that they bought, and perhaps sold for the same price. When you purchase and sell stock (for example) you get to deduct the price you purchased it for, plus any commissions, when you sell it. The difference is the gain or loss on the sale. A stock seems no different from selling a table saw that you bought, or a table that you made but which cost you to make it. Tax should be based on the gain or loss.

Mike

[Brian Holcombe]

Speak to your accountant and if you don’t have one, then hire one. I have an excellent accountant and have never regretted paying for their services.

You can’t avoid getting a 1099 From these service providers, they do it automatically once you meet their thresholds.

Brian, I believe what is meant is not that you can’t deduct your operating expenses from gross revenue but that you can’t use hobby ‘income’ as a write-off, meaning that if it isn’t a business then it is not capable of being a write-off. Given that income is generally referred to as gross revenue minus expenses, this would seem to make sense, but I certainly could be wrong and this is why I hire an accounting firm for this type of work.

[Brian Elfert]

If EBay has to send a 1099 for over $600 in 2022 I better sell the extra solar inverter I have. I bought it on EBay in 2020 and ended up using it for a few weeks before switching back to an old inverter. My plan was to wait until late January to sell. The holiday season is rarely a good time to sell anything that isn’t a gift.

It hardly seems fair to have to pay income tax when I will likely lose money on this item. It is something that would be hard to sell locally as not enough demand.

[Jim Koepke]

Not sure I believe that, Jim. I was turned away from buying coffee with cash yesterday.

WRT hobby income, please see this:

https://www.irs.gov/newsroom/five-things-to-remember-about-hobby-income-and-expenses

Wow, see what happens when you live out in the sticks and don't pay attention to the news.

This was found in USA Today:


There is no federal law prohibiting businesses from going cashless, however, some states have passed laws requiring businesses to accept cash.

It seems the pandemic has resulted in many businesses not wanting to handle cash since it could be a source of infection.

jtk

[Brian Elfert]

I expect that eBay will have to track the payments to you and generate the 1099. It's a payment for merchandise, and my reading of the requirements would indicate that they would have the same obligation as PayPal would.


I was thinking this is for payment processors only and Ebay is not really a payment processor. But, I did more research and both EBay and Etsy are affected also.

[Brian Elfert]

How is it fair that a person selling a personal item can't deduct the cost of the item from their income, but a business running a business on Ebay, Etsy, etc can? Sure, you can file taxes as a sole proprietor, but if you lose money then the IRS calls it a hobby and makes you pay taxes on your revenue with no deductions.

This may at least make a small dent in the resale of hard to get gaming systems although most will just switch to Craigslist or Facebook Marketplace with cash payment. I bet as many initial purchases of the PS5 have been resold as have ever been used to play video games.

[Brian Tymchak]

Brian, I believe what is meant is not that you can’t deduct your operating expenses from gross revenue but that you can’t use hobby ‘income’ as a write-off, meaning that if it isn’t a business then it is not capable of being a write-off. Given that income is generally referred to as gross revenue minus expenses, this would seem to make sense, but I certainly could be wrong and this is why I hire an accounting firm for this type of work.

Completely agree on consulting with the accountants before trying to deduct expenses against hobby income.

i don't want to beat a horse to death over this, so here's my last post on the topic.

please google this: are hobby expenses deductible

there are plenty of statements on this, by TurboTax, HR Block, and others. I doubt they all have a pretty basic feature of tax law wrong. I think the basic change with the tax act is with the definition of a hobby. If it's not an incorporated business, you don't get to deduct expenses. I'd love for it to not be true, but I think the law is pretty clear.

[Alex Zeller]

Ebay was created as a way for someone to sell items like at a garage sale. It's now more like Amazon as most of the sellers are doing it to earn a living. When the courts started to allow states to force ebay to collect sales tax it was just a matter of time before the next step, Paypal keeping track of money sellers earn, was going to happen. It's just a matter of time before the government monitors your bank account for deposits (not just large ones).

[Justin Rapp]

I received a notice from PayPal that I need to give them my social security number for tax purposes. The reason is that if I sell more than $600 of things in a year, they will do a 1099 on me. This only applies to things sold as "merchandise", it does not apply to money transferred between friends (what many people call "Friends and Family").

The problem with getting a 1099 is that you then have to deal with it in your tax return. If you sold a tool for less than you paid for it, there would be no "income" for tax purposes. But, technically, you have to have a record of what you bought it for, and that increases the record keeping problem. We would now have to keep receipts for anything we might sell in the future.

You can avoid the problem by using other payment techniques: You can require cash for any in-person sales or you could have have a person send you a check.

Personally, I don't want to have to deal with making sure I keep records of everything I bought in the past and will just not sell with PayPal payment in the future.

Has anyone else heard of this? Any accountants have any comments about the tax issue?

I think this was done to force people who essentially run a business using PayPal payment to report their income but it could affect all of us.

Mike

[Here's something (https://newsroom.paypal-corp.com/2021-11-04-New-US-Tax-Reporting-Requirements-Your-Questions-Answered)from PayPal about this.]
[Here's another source.] (https://stepanchukcpa.com/paypal-changes-you-should-know-about/)


Did you confirm your notice was from PayPal? Not by clicking on some link in the e-mail but logging into your paypal account. I am not sure 100% of the requirements of selling on PayPal, but isn't it just a means of a transaction? If your sales were going through a credit card, would your credit card service send you a 1099? Seems a bit like a phishing attempt to me.

[Jim Becker]

Did you confirm your notice was from PayPal? Not by clicking on some link in the e-mail but logging into your paypal account. I am not sure 100% of the requirements of selling on PayPal, but isn't it just a means of a transaction? If your sales were going through a credit card, would your credit card service send you a 1099? Seems a bit like a phishing attempt to me.
It's real and yes, because PayPal is a payment processor they need to do follow any reporting requirement that are placed on them by existing or new regulations.

[ChrisA Edwards]

The IRS has problems auditing and processing the current load of people that may be cheating the system.

How will they handle this with millions upon millions of system generated 1099 transactions.

I see people dropping the normal level of PayPal security, i.e. paying for goods or services and PayPal getting their fee, to just doing a cash transfer between friends and risking the deal doesn't go bad.

[Mike Henderson]

Did you confirm your notice was from PayPal? Not by clicking on some link in the e-mail but logging into your paypal account. I am not sure 100% of the requirements of selling on PayPal, but isn't it just a means of a transaction? If your sales were going through a credit card, would your credit card service send you a 1099? Seems a bit like a phishing attempt to me.

Yes, the notice is in the PayPal account. In the messages section of PayPal. When you go to your "Dashboard" page, at the top of the page is an icon that looks like a bell. It had a red bubble on it with the number 1 in the bubble. If you use PayPal, you should have the same notice.

It was not an email. In any case, I included links to sites that discuss it and where the requirement came from in my original post.

Mike

[Regarding how the IRS is going to deal with the 1099's - as long as you include the income from the 1099 in your tax return, you won't have any problems. If you don't include the 1099 info, they will send you a computer generated bill. No human will be involved, and no audit - just a bill.]

[Justin Rapp]

Yes, the notice is in the PayPal account. In the messages section of PayPal. When you go to your "Dashboard" page, at the top of the page is an icon that looks like a bell. It had a red bubble on it with the number 1 in the bubble. If you use PayPal, you should have the same notice. It was not an email. In any case, I included links to sites that discuss it and where the requirement came from in my original post.Mike[Regarding how the IRS is going to deal with the 1099's - as long as you include the income from the 1099 in your tax return, you won't have any problems. If you don't include the 1099 info, they will send you a computer generated bill. No human will be involved, and no audit - just a bill.]Ok - more legit :) The company I work for, due to the work we do, requires us to take tons of phishing courses so my alert is always up high when I see someone being asked for a SS# or some other personal info.

[Kevin Jenness]

When I was in Germany this fall I found that many small businesses would not accept credit cards. There seems to be a thriving cash economy due to people not wanting to be tracked for privacy as well as tax reasons. It is becoming harder and harder to stay off the radar especially if one has a smellphone.