Paypal reporting to the IRS - has this happened to you?

[kitkatvintage]

Does anyone have experience with Paypal reporting you to the IRS? I just got an notification that Paypal needs my tax information because I've either hit or am close to the point of needing to have the money reported as income ($20,000 in a year is the cut off).

The problem is that the majority of what I've sold this year was not mine. I have been selling a large amount of ponies & stuff for a friend. The money passed through my account, and then I sent it off to it's rightful owner. So all of that money wasn't my "income", and now I have no idea how to handle this situation.

Has anyone had experience with this? What portion of the incoming Paypal money is expected to go to the IRS?

[NoDivision]

It counts as part of your income, so however your income taxes are calculated, paypal is part of it. They introduced this policy in 2010 and it took effect for the 2011 tax year.

Unfortunately at this point I 'm not sure what you can do. They don't tend to care where the money went to after you got it - it came to your account and therefore is viewed as part of your income. Still, it can't hurt to give them a call and see if you can talk to a representative to get a clearer picture.

[teresat]

I would also talk to an accountant about this.

[Cassie85]

Did you receive this info from your actual paypal page or from an email? Beware of paypal emails, as most of them are scams.

[medleysong]

Yes, I went through this during the last filing season as I sold my entire collection that year and *choke* went well over the $20,000 dollar limit. Feel free to pm me and I can go into detail about how it worked for me but essentially I was able to claim the value I had paid for the ponies originally as inventory so I really didn't make much if anything outside what I originally paid. You can also claim gas for shipping, cost of shipping supplies, cost of a camera if you use it for the sales and and so forth. I was freaking out because I had already filed my taxes and learned about it afterward. I had to do an amend but it all worked out fine. Again, feel free to hit me up. I am not an expert by any means and in your particular case it might be wise to talk to someone more knowledgable about what to do in your particular case. If you have any questions though I will gladly try to help

[tootie_tails]

Does anyone have experience with Paypal reporting you to the IRS? I just got an notification that Paypal needs my tax information because I've either hit or am close to the point of needing to have the money reported as income ($20,000 in a year is the cut off).

Wow, scary!   
Is this from auctions and such only, or your total general incoming amount in paypal over a year..?
I have never heard of anything like this... and I'm in sweden, we are the most heavily taxed people in the world! (I think).
Of course, I have never been even close to making 'income amounts' from selling ponies and stuff. But I know some people reach the (swedish) cut off limit from selling on tradera. I don't think tradera ever report anyone though.

Is it even legal for paypal to do that? I can't believe it is happening, and in the us...!

[RockinPrettyBeats]

lol, not only is it legal for Paypal to do this but they HAVE to do it. I'm surprised some are only hearing about this now as this started last year actually.

OP - Are you seriously selling $20,000 worth of some one else's merch? Don't even think about shrugging this off or saying this isn't your income. The gov won't care.

I have no idea how much was actually yours or not but it's hard to believe you are selling that much for someone else. If you are, then I really wish I heard about it earlier as I would have told you to stop. Selling one or two ponies on Ebay is fine. Selling a miasma of items for someone else is going to muddy up the waters for you.

Here are some options:

1. Claim it and have your friend pay what you owe. Good luck with that.

2. Are you guys making a profit or is this just a hobby? If it's a hobby claim it as one. Look up "taxes hobby income" and you will see how that works.

3. (This one I know little about) Try to write it on your taxes as you "paying" your friend or something to that extent. Of course, then she will have to claim it on her taxes. I'm not sure how this would work. You might have to call yourself self-employed in which case, yeah you are susceptible to paying MORE taxes than the average joe.

Do some research. No matter what you do, deduct the cost of pony, shipping, fees and everything from the actual profit. You did not actually make $20,000 so don't worry you won't have to pay taxes on that amount.

If you are still selling for your friend, I would stop. Tell her about this issue.

[ponylady]

It started in 2011, and this new law requires all US payment providers, including PayPal, to report sales information to the IRS about certain customers who receive payments for the sale of goods or services. The rule can be found under the Internal Revenue Code (IRC) Section 6050W, and applies only for sales on or after January 1, 2011.

Paypal will report your earnings to the IRS if you meet both of the following requirements:
 1.You receive $20,000 or more during the year (gross payments, not net).
 2.You process at least 200 transactions.

It does not matter to them that you sold for someone else, it is showing that you received the money through your Paypal account.  They will still send the IRS a 1099-K. 

I had to file last year so if you need any help, just send me a PM.  It's not as bad as you think as long as you have kept good records.

[goddessofpeep]

This sounds like a job for a professional tax accountant.  I would *highly* recommend spending the money to hire one.  This is an incredibly complex situation since the  money went to somebody else, and you could very well be in trouble with the IRS if things aren't filed correctly.  A professional can help you figure out how much is actually taxable, how much you might owe, and how to take into account the fact that you didn't keep the money.

Also, if it turns out you may owe a significant amount of money, you may be in for a trip to a lawyer if your friend won't pay.  You may have to pay the IRS directly, but your friend may be legally responsible to reimburse you for the taxes you paid.

[SFlame]

@ RockinPrettyBeats - Shes actually helping out the family of a massive collector who has unfortunately passed away which is why she has so much merch and items.

[Rosse]

Not a fun situation... but honestly, if you are selling stuff for those kind of amounts, this cannot have come as a surprise? The honest thing to do would probably be for your friend to actually pay the amount of taxes owed. If you've sold stuff for 20k, there should still be a lot left... but yeah, talking to a professional about this situation may be a good idea!

tootie - I don't think Tradera will report it themselves, but Skatteverket (swedish IRS) do keep a look out for those sellers who appear to do it as a business, and force them to pay taxes. If you just sell stuff now and then from your own personal belongings however, the limit is 50k SEK (ca $7k) a year.

[kitkatvintage]

Thank everyone & especially medleysong & ponylady for offering help as you've been through this before.

At first I received an email about this, and later logged on to my Paypal account to check it out (obviously not through any links in the email). Yes, it's real as several other people here confirmed.

@ RockinPrettyBeats - Shes actually helping out the family of a massive collector who has unfortunately passed away which is why she has so much merch and items.

Yes, SFlame is right. I had an agreement to help my friend's family deal with her collection after she passed. Her daughter has been very wonderful to work with & when I emailed her regarding this surprise about taxes, she offered a solution between the two of us. No need for finger pointing, or lawyers, or anything. There's a lot of trust involved when working with this amount of money.

I checked out the numbers on Paypal & I haven't hit the point of being reported yet, but I guess after you hit a certain dollar figure they collect your tax information to be ready. So if I stop using my Paypal account for the year, I might be ok.

I guess we will be getting an accountant around tax time.

[RockinPrettyBeats]

KitKat - Just because you haven't hit the $20,000 limit doesn't mean Paypal won't report your income. Many people think that if they are at $10,000 or $15,000 they are safe. Indeed, people have had Paypal report their income WAY before $20,000. Nothing is cut and dry so you will most likely be reported even if you stop selling.

However, not selling anymore MIGHT stop them. It's pretty much 50/50 at this point.

The thing that I don't get is that since you are close to this person, why didn't you just open up their account under their name? At this point, you can still do that and open up a whole new paypal with a whole new limit limitation.

Also, I want to point out that having $20,000 of paypal income and claiming $5000 of net income is normal. You'd be surprised how much fees, costs, etc take out.

And as a quick warning to everyone, you're not supposed to wait until Paypal reports your income to the IRS. You are supposed to do it regardless of how much you make. Even if you buy a pony for $5 and sell it for $1 you are supposed to report it. So keep that in mind and there will be no surprises.

[goddessofpeep]

I'd actually check into an accountant now.  They can advise you on what you should be doing to protect yourself right now.  This is a very complex issue, and it might be best to bring it to an accountant during the down season when he/she can devote more time to your problems.   It's not going to go away, and right now you have lots of time to get receipts, track down paperwork, and just deal with this.  Nearer to tax season it's going to be a lot more stressful, and you may run out of time if you need to file or obtain some forms.  Also, if you get this taken care of now, it won't be hanging over your head for the next 8 months.  You'll also have a lot of extra time to research and check out your accountant now.  It's probably not the kind of thing you want to be doing at the last possible second.  You might need to file some forms, or your friend might need to file some forms. 

Accountants aren't cheap, but they're a heck of a lot cheaper than what the IRS will do to you if you mess up your filings!

Good luck! 

[kitkatvintage]

The thing that I don't get is that since you are close to this person, why didn't you just open up their account under their name? At this point, you can still do that and open up a whole new paypal with a whole new limit.

I'm not sure if you've read the posts above, but if you have you would see that opening an account in the name of the person I'm selling for is not an option.

I appreciate the advice of those who have dealt with this. At this point, I know what I need to do as far as gathering information & tracking expenses, ect. Thank you for the help, everyone.