With Proper Preparation, the New “PayPal 1099” Doesn’t Have to Disrupt Your Tax Time

I’m having a little stay-cation this week to celebrate the Thanksgiving holiday (not to mention my wedding anniversary) but I’ve got a great guest post for you from Outright.com.  I love using Outright.com to keep track of all my business finances, and the folks at Outright have happily shared some tips for dealing with the dreaded, I mean highly anticipated, PayPal 1099 that you may be seeing in your mailbox this tax season!  Thanks Outright!

You’re an old pro at this, so you’re not worried. You have your whole year’s receipts in order, all your business expenses organized, and are almost psyched to sit down to do your taxes for 2012.

Except, wait…what’s this? Something from PayPal in the mail? That’s weird, but shouldn’t be anything too bad. You open it and gasp in terror – it’s a 1099!

That’s right, PayPal now sends out 1099s to online sellers. Like other online sellers out there, you’re probably a little worried, as this may completely disrupt your clockwork tax-time routine. The last thing we want is for our online seller friends to be stressed out during tax time, so we thought we would give you the skinny before this brand new tax form is dropped on your head next year.

What’s all this then?

You might be getting a new piece of tax paperwork in the mail this year because of a little known stipulation in the 2008 Housing and Economic Recovery Act designed to make sure people who sell online are paying income taxes. This stipulation required payment processors like PayPal to report large volumes of transactions to the IRS. This measure will purportedly catch less-than-scrupulous folks who collect large profits each year using PayPal and other payment processors but who fail to report those earnings to the IRS at the end of the year.

Like any 1099, the PayPal 1099 merely contains information about your business’ finances for the year. The only difference is this document contains financial information that you usually log yourself. All of this information is also sent to the IRS ahead of time.

When you’re figuring out what you owe for taxes next year, you’ll now have a visual aid to compare to.  (Remember, this form 1099-K is sent to the IRS as well – so they also have a form to compare to!) If you’ve been in the business for a while, you’ve probably already got a system in place to keep your finances in order. Simply use the 1099 to more accurately log your earnings.

Of course, the 1099 won’t have one thing – how much you spent to maintain your craft business! It merely logs how much you actually made from sales through PayPal. If you don’t properly record and report your business expenses on your Schedule C, the IRS will never know, and you’ll end up paying more taxes than you should. This means it’s more important than ever for you to record every single business expense. Web apps like Outright allow you to import your sales info from sites like PayPal, Etsy, eBay and even your bank accounts and credit cards so that you don’t have to do thankless data entry on top of tedious tax compliance!

What Now?

You may be asking yourself: what do I do now in preparation for this development? Well, for one, the answer may be “nothing,” as you may not even see one of these forms. Only sellers who collected $20,000 through PayPal (or another online payment processing platform) and racked up over 200 transactions will receive one of these new 1099-Ks in the mail. If you made anything less, you’re off the hook.

If you do find a 1099-K from PayPal in your mailbox come February, the best piece of advice we can give you is that old British saying, “Keep calm and carry on!” As long as you track all of your expenses (or, as we like to call them “tax deductions”) then this new form should be a mere blip on your tax time radar.

For an easy way to get your expenses in order in anticipation of the PayPal 1099, sign up for Outright.com for free until the end of tax season in April 2012!