PayPal payments vs gifts. How does the IRS or PayPal know the difference?

A friend has sent me several thousand as a gift to my PayPal account. How does the IRS or PayPal know it's a gift or business payment? I use PayPal for mystery shopping payments. I have no other business.

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As far as I know, PayPal has no way of knowing. Your records will demonstrate to the IRS what is business revenue and what is not. Money sent from a friend is not money sent by a company. Presumably, the amount you received is below the $10,000 threshold for reporting money transfers. Here is an explanation from the IRS in case the transfer was for $10,000 or more: [www.irs.gov]

@johnb974 wrote:

A friend has sent me several thousand as a gift to my PayPal account. How does the IRS or PayPal know it's a gift or business payment? I use PayPal for mystery shopping payments. I have no other business.

Shopping Southeast Pennsylvania, Delaware above the canal, and South Jersey since 2008

@myst4au wrote:

As far as I know, PayPal has no way of knowing. Your records will demonstrate to the IRS what is business revenue and what is not. Money sent from a friend is not money sent by a company. Presumably, the amount you received is below the $10,000 threshold for reporting money transfers. Here is an explanation from the IRS in case the transfer was for $10,000 or more: [www.irs.gov]
@johnb974 wrote:

A friend has sent me several thousand as a gift to my PayPal account. How does the IRS or PayPal know it's a gift or business payment? I use PayPal for mystery shopping payments. I have no other business.

It is less than $10,000. I think if I did not sell her anything or sent her anything they would have to see it as a gift. She kept it under $10,000 because of the IRS rules.

How do politicians and Supreme Court Justices get around not getting audited for the very same thing?

The friend really did send me the money, but I'm concerned about how the IRS will see it.

Edited 1 time(s). Last edit at 04/18/2023 03:20AM by johnb974.

The US Internal Revenue Service (IRS) demands information from all US payment processors, including PayPal, about clients who receive payments for the sale of goods and services beyond the statutory threshold in a given calendar year.

If your friend sent it via Friends & Family and not Goods & Services, I would think that should indicate it right there that it was a gift. I could be wrong, but I believe the 1099 they issue is only for money received through Goods & Services (if not, it should be!).
.

Edited 1 time(s). Last edit at 04/18/2023 07:59AM by shopnyc.

Payments that were sent as "a friend" are not reported as income to the IRS by PayPal.

This is correct.

@shopnyc wrote:

If your friend sent it via Friends & Family and not Goods & Services, I would think that should indicate it right there that it was a gift. I could be wrong, but I believe the 1099 they issue is only for money received through Goods & Services (if not, it should be!).
.

How do you know it it's sent as a friend?

I just noticed she sent it as "Payment Type: Goods and Services" can that be changed?

The person sending the money has to select to send as a friend. If they draft the funds from a bank account, there is no fee, but if they do send as a friend, they do not have buyer protection. I think the transaction would have to be manually started to be able to change it from Goods & Services. I used to sell some things and people would pay me with PayPal, and sometimes they would send it as a friend from a bank account so I did not have to pay the fee.

This is about taxes and a 1099. It's not about any fees.

You have to keep track of any pay on your own spreadsheet.
IRS literally could not care less how you were paid.
You are also supposed to report cash wages with no official record.

If PayPal sends you a 1099, will they also send a 1099 to the IRS?

Once my son reimbursed me for something and sent it as "Goods & Services," it was only a mere $50.00, but a fee was assessed at $1.94. I told him about it and he said he accidentally selected G&S.

@johnb974 - Do you get assessed a small fee when your friend sends you the moola?

@purpleicee wrote:

Once my son reimbursed me for something and sent it as "Goods & Services," it was only a mere $50.00, but a fee was assessed at $1.94. I told him about it and he said he accidentally selected G&S.

@johnb974 - Do you get assessed a small fee when your friend sends you the moola?

I did not. There was no fee.

@johnb974 - Then it seems like you have nothing to worry about.

@purpleicee wrote:

@johnb974 - Then it seems like you have nothing to worry about.

There was a fee on each transfer. I just checked. Is there any way to correct this? This was a gift from a friend.

Edited 1 time(s). Last edit at 04/18/2023 06:01PM by johnb974.

Contact Paypal directly?

@Zek wrote:

Contact Paypal directly?

I looked it up. I would have to send the money back and the friend would have to send it back again as Family and Friends. It also said it would take awhile. Mystery shops around me are drying up. I use to make around a $1000 a month, now it's less than $500. I could just do less mystery shopping and relax at home. I could also use the money for a new computer, printer and other things and write them off.

@johnb974 - You know it was not income as it was a gift each time. So, you just have to worry about reporting your actual income, not the gift. Just make yourself a separate spreadsheet or however you document your records and keep track of the date and amounts of the gifts so you have documentation incase you every get that knock on the door from the men in the black suits.

@purpleicee wrote:

@johnb974 - You know it was not income as it was a gift each time. So, you just have to worry about reporting your actual income, not the gift. Just make yourself a separate spreadsheet or however you document your records and keep track of the date and amounts of the gifts so you have documentation incase you every get that knock on the door from the men in the black suits.

Doesn't PayPal send a 1099k to the IRS? Or is it just up to me to report it?

Yes, but it does not matter, just like when any MSC sends one that they made an error on the amounts or if they did not separate earnings from reimbursement. You report what you know to be true and is true.

I found this: Receiving a 1099-K doesn’t necessarily mean you owe taxes on that money. First, not all of the transactions on your 1099-K may be business-related. (The amount could include your roommate reimbursing you for groceries, for example.) Second, you might have tax deductions that could offset some of your business income.

So as long as I can show I didn't sell or send them anything, I should be fine. My only business income is from mystery shopping.

Many of my shops for eating out have reimbursements. PayPal will not separate reimbursements from payments. I just have to keep records. This is going to be a mess for many people who have never had to deal with a 1099. How many people are going to make the mistake of counting payments twice? One 1099 from the company and one 1099 from PayPal.

So this will not be a problem as long as I can show it was a gift and not a sale. Even if the friend made the mistake of using "Good and Services"?

It should not be an issue with the IRA, but didn't you say that you had paid a fee to receive the money from your friend? If so, that is money down the drain.

@johnb974 wrote:

So this will not be a problem as long as I can show it was a gift and not a sale. Even if the friend made the mistake of using "Good and Services"?

Shopping Southeast Pennsylvania, Delaware above the canal, and South Jersey since 2008

myst,
I am smiling at the idea that it will not be an issue for the IRA. Also, probably not for the IRS.

Based in MD, near DC
Shopping from the Carolinas to New York
Have video cam; will travel

Poor customer service? Don't get mad; get video.

@myst4au wrote:

It should not be an issue with the IRA, but didn't you say that you had paid a fee to receive the money from your friend? If so, that is money down the drain.
@johnb974 wrote:

So this will not be a problem as long as I can show it was a gift and not a sale. Even if the friend made the mistake of using "Good and Services"?

Compared to how much they sent me, I don't mind.

The chance of being audited is low -- the IRS is severly understaffed and backlogged. That being said make sure you can document everything and you should be fine. If you do get audited your friend may have to write and sign a noterized letter but since she was a good enough friend to give you the money then likely that shouldn't be an issue. If you want to be proactive have her write it now and then it will be with your records.

@jazzzyjd wrote:

The chance of being audited is low -- the IRS is severly understaffed and backlogged. That being said make sure you can document everything and you should be fine. If you do get audited your friend may have to write and sign a noterized letter but since she was a good enough friend to give you the money then likely that shouldn't be an issue. If you want to be proactive have her write it now and then it will be with your records.

I have the messages to show she sent the money as a gift. I saved a copy of our conversation about the gift.

With the IRS now looking at pay apps sending out 1099's, they are going to be even more backlogged. This is going to be a mess.

Edited 2 time(s). Last edit at 04/21/2023 07:56PM by johnb974.

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PayPal payments vs gifts. How does the IRS or PayPal know the difference?

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