Immediately I got a notice from Paypal that I have to give them my tax ID (which I presume is my SS number) so they can withhold 24% of every penny I receive through them over $600 a year. They will send me a 1099-K, and I will have to prove to the IRS that I don’t owe income tax on these payments.
I have been collecting fountain pens for the past 6 years, and now I have way too many, and I have been planning to sell off a bunch of them over the next three months. I was planning to use Paypal for most payments, being willing to absorb the fees. But if I now have to also endure 24% withholding and not get that part of my money until some time next year, assuming I can satisfy the IRS that this is not profit (at least I hope that’s how it’s going to work) I may have to re-think the whole thing. Maybe I’ll just tell buyers to send me a personal check. I kept track of how much I paid, fortunately, but I don’t have receipts.
Is this news to anyone else? I don’t think I’ve ever sold anything using Paypal before, but their email to me said “tax laws have changed” and that’s why they’re doing this.
I willingly, if not cheerfully, pay my taxes. Federal and state income taxes, almost 10% sales taxes where I live, property taxes. My federal tax rate is nowhere near 24%. This just sucks.
I’ve received payments for services via Paypal for many years and not run into this. Maybe something has changed. However, reading this Paypal page, I think you’re misinterpreting the situation. It says
Once you receive $600 in payments for goods and services within a calendar year, tax laws require us to withhold 24% of such payments when you have not confirmed your taxpayer status by either providing your US tax ID or completing a Certificate of Foreign Status.
My emphasis added. I read that to mean that after you confirm your taxpayer status, they will no longer take the backup withholding. The Paypal page links to this IRS page, which says
There are situations when the payer is required to withhold at the current rate of 24 percent. … This is known as Backup Withholding (BWH) and may be required:
Under the BWH-B program because you failed to provide a correct taxpayer identification number (TIN) to the payer for reporting on the required information return…
Under the BWH-C program because you failed to report or underreported interest and dividend income you received on your federal income tax return…
Again, I read this to say that after you provide the necessary information to Paypal, they will no longer take backup withholding from your payments.
A TIN, taxpayer id number, covers both EINs and SSNs.
I was recently doing something with my business paypal account and was asked to provide my EIN to prevent backup withholding. Since you (OP) presumably don’t have an EIN, and paypal is specifically asking for a TIN, your SSN should work just fine.
FWIW, this is the norm for other ways to collect money as well. Even my credit card processor will keep 24% of our deposits if there’s an issue with our EIN (missing, doesn’t match business name etc), same with some of our B2B customers.
The 24% number is just the default rate the IRS uses in this situation. They’re essentially requiring paypal to garnish the most you’re likely to owe on that income and then it’s up to you to recover it when you do your tax return.
Is there some reason you don’t want to give paypal your SSN? That should be the end of the backup withholding issue.
I plead guilty to jumping to conclusions. I read the thing at least three times, but I was too focused on the “withhold 24%” part and didn’t parse the meaning accurately, Thank you for helping me gently off the ledge.
I did provide Paypal my SS number yesterday, before I posted.
Digging into it a bit further on the IRS site, I find that this will add a little complexity to filling in my federal return, and I won’t be able to file as early as I usually do, because the 1099-K form only has to be sent out by the end of February. Cost of doing business, I guess, even if that “business” is selling personal items, mostly at a loss.
More seriously, I did not keep paper receipts for some of the purchases – I recorded the amounts paid in my pen database, and threw out the receipts (at that time I wasn’t thinking about the possibility of re-selling). So I know the correct amount to claim as profit or loss in each case, but I won’t be able to prove all of them if I’m audited. I suppose I may need to consult a tax accountant to consider the liability issues.
For a small number of items w modest annual rates of return and only a small fraction of your total taxable income the audit risk is zero to within a rounding error.
Your database, if comprehensive and apparently contemporaneous, will be accepted as a valid business record.
The Feds have implemented this a few years ago but most states have not enforced it and kept the older much higher limit. Services like Venmo (which is owned by PayPal) or Zelle often have two “tiers” of payments, personal/friends and family ones which don’t generate the 1099k and payments (regardless of whether your account is set up as personal or business) which may generate the form but provide buyer and seller protections not offered by the personal transactions.
If you’re doing this often then the correct way might be to file taxes on Schedule C, and if indeed selling at a loss offset the selling cost with the FMV. If you receive a 1099K and thnk it’s in error, you can instead offset on Schedule 1, lines 8z and 24z.
You’re probably never going to be audited (for this reason) and the time to worry about a 1099 is when you actually get it. In my experience with Paypal, you’re not going to get good answers before the fact from them, they’ll tell you something that’s not true.