Upon going into my Paypal this morning there was a notice that I had to put in my SS number or Tax ID due to new IRS requirements. We sell some things on Ebay but not near the 20 grand limit. However I do get paid through several MS companies through Paypal. Are they going to consider this for taxes? Especially if I am going over the 600.00 benchmark to be paying taxes via a regular 1099? (Basically will I be double hit?) And for the 200 transactions, is that 200 transactions of being paid or being made (I use my Paypal card all the time for purchases as I have it linked to my checking account and at least Paypal gives cash back per month for using it). Any advice would be welcomed...I AM SO CONFUSED!! :-)

I would not worry about it. 1099s are 'informational reports' to IRS, regardless of their source. My investment accounts send them to me, my banks send them to me, some shopping companies send them to me.

In theory profits from sales on eBay are taxable, though I know of no casual sellers who have ever even considered it. It would be more appropriate, perhaps, for eBay to be reporting sales to IRS by seller, but I'm sure they have found a way around that just as the owner of a flea market does not have to report sales (in part because the owner of the flea market has no idea what the vendors who rent spaces have as sales). The 'next best thing' is to tag the Paypal receipts, though this too is nonsense since some eBay vendors take credit cards or debit cards and some take personal checks or money orders and don't run their payments through Paypal at all.

I do not file copies of 1099s received with my tax return and you do not either. They are informational reports.

I never receive $500 or more through Paypal in any month, so it is unlikely I will receive any 1099 of any sort from them.

What I do need to do is file a Schedule C for my business. Although I could list only fees and bonuses as income, I choose to report as income every penny I receive--whether it is through Paypal, by check or by direct deposit. My records support those receipts and break them down to what is fees, what is bonuses and what is reimbursements. Reimbursements are not taxable so are deducted from my return as a single line item I create in the page 2 'miscellaneous' section called something like "Reimbursements included income". The income portion of my Schedule C has a space for payments I have received 1099s on and for payments I did not receive 1099s on. More than half of the 1099s I receive do not correspond to my records for the company and generally the discrepancy is not large enough to make an issue of. I simply add up what they report and put it on the 1099 line. I then subtract that dollar amount from my total income + reimbursements for the year on my records and enter that as income for which I received no 1099s. I am an 'accrual' taxpayer so I am paying taxes on my net 'on paper' business for the year while a 'cash' taxpayer pays taxes on what they have received during the year.

If I got a 1099 from Paypal I would NOT reflect it anywhere on my return because I have done no work for Paypal and they have only been a conduit for payments. I will check and make sure that it is somewhere near correct for the amount of money that has been deposited to them during the year, but those payments that are for mystery shopping will have already been reflected on my Schedule C for mystery shopping and if I have been an eBay seller I will need to consider a Schedule C for that business as well.

Flash,

As usual, you provided information very valuable to me. Since I am new at this, I have been stewing about reporting it accurately to the IRS. As soon as I read your post, I did the "google" thing on the difference between the two methods (accrual vs. cash). The reference stated that "Accrual basis accounting is the method of accounting most businesses and professionals are required to use by law".

Just wondered if you think our business is one of those that would be legally required to use this method.

Thanks!

No, there is no indication I have ever found that would require self-employeds such as us to do that. For some professions I suspect it might be required. You do need to elect one or the other method for the first Schedule C you file for your business and you must stick with that method for the life of your business. (I understand that there is paperwork you can file with IRS to request a change from one method to another for specified reasons, but who wants to invite that kind of scrutiny?)

The way in which I handle accounting for my business is by months, and my mindset is to focus more on the production of the month rather than the receipts of the month. At any point I can tell whether for the calendar year my business is profitable or not and based on that I can make year end adjustments to my expenses to have a slightly profitable but not hugely profitable year. Thus I use the accrual method. When TurboTax comes out around Thanksgiving I make a preliminary run on my Schedule C. At that point I will have a reasonable idea of how much work I will be doing in December and I can see pretty accurately what my business activity will do to my taxes for the year. I do relatively little work between Christmas and New Years, so during that week I do an update of my Schedule C and decide whether it is time to go shopping. A final net income of $400 or more will have me paying self-employment taxes, so if I am too profitable it is time to purchase equipment such as a new camera, a new laptop, or 'office supplies' such as SD cards, DVRs, external microphones, toner for my printer, paper, etc. to reduce my profitability.

As a cash taxpayer, you are dependent on when the check comes in the mail. So you can calculate what you have received and make your year end adjustments, but if you receive $500 worth of checks in your mailbox on December 30th you could be paying self-employment taxes. Similarly, if you finally stop shopping during the last month or so of the year, you could be needing to file a Schedule C the following year due to checks that arrived after Dec 31 for which you have no offsetting expenses because a cash taxpayer claims expenses when incurred and receipts when received.

Since 1972 I have always run my businesses on the cash accounting method. Just a matter of different strokes for different folks.

Many thanks for the added information, Flash. I think the accrual method will work much better for me in this vocation. I have no control or any real way of predicting exactly when multiple companies will pay but I have control over both shops accepted in a time period and expenses. Doubt that I will ever have your skills in many areas but it is something to aspire to!

That is my impression as well and I do like to tightly control my taxes and my tax bracket. It means that I can plan investment purchases/sales better and figure out how much each year I can convert of old IRA money to tax-free forever Roth IRA status.