Popular small business tax questions, answered.

Aug 21 2018 | PayPal editorial staff

Aaron Berson, manager and cloud accounting ecosystem curator at accounting firm EisnerAmper, offers his insights on common small business tax questions.
Please note: The information in this article does not constitute tax advice and should not be relied on as such. You should always obtain independent, professional accounting, tax, financial, and legal advice before engaging in any transaction.

Taxes. Just the word may be enough to raise your blood pressure, especially if you’re busy running your business and would rather serve customers or brainstorm new products than deal with tax paperwork. But having some insight into the world of taxes may help alleviate some of the stress. 
 
Q. Can I deduct business expenses if I have no income?
A. I recommend that my clients deduct all of their expenses. Here’s how I explain this to them: If you have more expenses than income – which can be common when you’re just starting your business – you have a net operating loss (NOL). This loss may be able to be used to offset taxes from other income (such as any W-2 employee income that you earn) depending on your business type, or it may be possible to carry it over into future tax years, which could also help you save when you do have income. Keep in mind that rules for NOLs have changed with 2017’s new federal tax bill, so check with your financial advisor to see how the changes might affect you.
 
Q. Can I take deductions for business expenses even if I don’t have the receipts?
A. It’s possible, although if you are audited by tax authorities, you’ll have to produce documentation for the expenses you’re claiming. In general, for travel, entertainment, and auto expenses, you don’t need receipts if the expense is less than $75 (see this IRS publication for more details about the rules for deducting and documenting these expenses). So, if you forget to save the receipts for a business lunch here or there, or a gas fill-up, you may still be able to take the deduction. However, it’s a good practice to keep receipts for everything to do with your business.
 
Q. What’s the difference between being “self-employed” and being a “sole proprietor”?
A. As we tell our clients, there’s often no difference from a tax standpoint. Self-employment just means that you work for yourself, whether it’s as a freelancer or as a business owner. A sole proprietor is the sole owner of a business and is liable for its debts. However, a sole proprietorship is not a legal entity (the way an LLC is). Income from sole proprietorships is simply reported on Schedule C of your personal tax return – with no need for a separate tax return.
 
Q. Can I file taxes as a business if I don’t have a business license?
A. Technically, yes – you shouldn’t need a business license to file your taxes. But I’d note that many states require that businesses be licensed, which means that operating without a business license could lead to legal issues separate from taxes. That said, you may not need a business license to file taxes on Schedule C of your personal tax return if you don’t have a formal name or business entity depending on your state.
 
Q. Does my business need to become a legal entity like an LLC or an S-Corp?
A. There are a lot of things to take into consideration when deciding what type of legal entity to create for your business. Creating an LLC can offer valuable legal protections, such as separating personal and business property (a lawyer can help you determine if this makes sense for your business). You may have to pay extra local taxes to operate as an LLC, but there are advantages as well, including the ability to open a bank account under the business’s name.
 
Here are some basic differences among the ways you can structure your business:
  • Sole proprietor or LLC (limited liability company): These are known as “flow-through entities,” meaning the income flows to you as the owner and is reported on your personal income tax return and taxed at your personal rate. The new 2017 tax law provides for up to a 20% exclusion of this type of income if you meet certain requirements – ask your accountant about this.
  • C-Corporation: A C-Corp is a legal entity that stands on its own, meaning it pays its own taxes. This can create double taxation if income is taken out by any owners in certain ways, such as dividends.
  • S-Corporation: This is a legal entity like a C-Corp; but for taxation purposes, S-Corps act as flow-through entities. S-Corps are not recognized in all jurisdictions, and some jurisdictions treat them like C-Corps. For example, In New York City S-Corps are treated as C-Corps and must pay corporate taxes.
 
Q. What income tax forms do I need to file for my business?
A. Each state has its own forms for different business types. For federal income taxes, here’s a brief list of the IRS forms needed for various business types:
  • If you are the sole owner of an LLC or operating as a sole proprietor, you will need to file a Schedule C, which is part of your personal 1040 filing.
  • If you are self-employed via an LLC with any other business owners, you will need to file a form 1065. There are also forms that you need to attach to your personal tax return as well.
  • If you have a corporation (C-Corp or S-Corp), you will need to file a Form 1120 or 1120S.  In addition, you may need to also file additional forms with your personal tax return too.
  • You may need to file 1099s for any subcontractors that are paid over $600 per year, or W2s for employees.
 
The more you know about the taxes that affect your business, the more prepared you’ll feel when filing deadlines approach.
 
For other tips on running your business, visit the PayPal Business Resource Center often – you’ll find articles on payment processing, selling internationally, and marketing, among many other topics.
 
Aaron Berson is a manager in EisnerAmper’s Private Business Services group. He serves a diverse client base from startups to mid-sized companies. His expertise includes financial statement preparation, tax preparation, and accounting system implementation and training as well as app ecosystem curation and education.

 
This article is a general summary of certain U.S. Federal income tax laws and regulations relating to small businesses and is provided for informational purposes only. Neither PayPal nor EisnerAmper LLP represent or warrant that the guidance given in this article is complete, appropriate for any particular business purpose or use, or an accurate description of the laws that may apply to any particular taxpayer.

Frequently asked questions.

All US payment processors, including PayPal, are required by the Internal Revenue Service(IRS) to provide information to the IRS about certain customers who receive payments for the sale of goods or services through PayPal. Form 1099-K and B-Notice are tax forms which are applicable to holders of accounts both within and outside the United States since it pertains to income reporting for US persons/entities.

FATCA affects account holders that are outside the United States, and it requires PayPal to collect tax documents or certifications from account holders stating whether they are US persons. This includes, but is not limited to, business entities, and some individuals that open accounts outside the United States.

Tax Form 1099-K Tips:
  • If you feel there is a discrepancy in your tax Form 1099-K, please review your reconciliation report and provide us with the transaction ID(s) in question and the justification for why the transaction is being disputed. Click Contact at the bottom of any page to call or email us.
You can also view these additional 1099-K Help Center articles:
B-Notice Tips:
  • If there are any discrepancies with your tax identification number and legal name that was used by PayPal for tax Form 1099-K reporting filing with the IRS, you may receive an IRS B-Notice
  • The B-Notice mailing will provide you with all of the additional information we need from you.
    • If you received a 1st B-Notice (which happens the first year that the IRS identifies a mismatch in tax identification number/legal name), log in to your PayPal account and follow the Alert Notification to provide the requested information. You may need to download and fill out the IRS tax Form W-9 for PayPal to review.
    • If you received a 2nd B-Notice (which happens the second consecutive year that the IRS identifies a mismatch in tax identification number/legal name), you must provide either a copy of your Social Security Card (individuals or sole proprietors) or US IRS tax Letter 147C (entities). Log in to your PayPal account, and go to the Resolution Center to upload the document.
  • The IRS does not have an online solution for requesting a tax Letter 147 C; the IRS will mail or fax the letter to you. To contact the IRS for a Letter 147C, you should call the IRS's Business and Specialty Tax line at 1-800-829-4933 between 7am and 7pm, local time, Monday through Friday. Requesting a faxed copy may be the quickest manner to get a copy of the tax Letter 147C. You can also view our tax information page for more information.
  • Fully complete and sign the relevant form and upload it by logging into your PayPal account and following the Notification prompt.
  • Why did I receive an IRS B-Notice?

FATCA Tips:
  • Only impactful for account holders outside of the United States.
  • PayPal must collect documentation such as certification of non-US status and either a tax Form W-9 for US persons or entities that are subject to US tax, or a tax Form W8BEN/W8BEN-E for non-US persons or entities that are not subject to US tax withholding and reporting.
  • Most business users who need to provide the requested information will be able to do so by logging into their PayPal account and following the notification prompts.
You can also view these additional FATCA Help Center articles:You can find more tax related information on the PayPal IRS tax website.
If you are asked to provide your tax identification number (TIN), such as a Social Security Number (SSN) or Employer Identification Number (EIN), to your existing account(s), we will attempt to verify the information with the IRS. If your TIN fails verification, you will need to fill out an equivalent tax Form W-9.   

If the discrepancy persist, you may receive an IRS B-Notice later in the year to help you correct the mismatch.  

Some common reasons why a TIN may fail verification include:
  • Invalid Tax Identification Number (EIN, SSN, iTIN)
  • The name that appears on your PayPal account does not match with the IRS has on file.  
  • The business name registered onto your PayPal account is different than the legal business name.
    
Tip: Minor typographical errors with the name (missing period or capitalization) in a business name would not be why there is an IRS mismatch
    
How do I change the name on my PayPal account?
If you’re a U.S. taxpayer, you can pay your individual or business taxes to the IRS with PayPal.
Here’s how:
  1. Go to payUSAtax.com by April 15 and select Make a Personal Payment.
  2. Select the relevant tax payment category, enter your information, and choose PayPal for payment.
  3. Log in to your PayPal account to confirm your payment and get a confirmation number.
NOTE: payUSAtax.com charges a convenience fee of 1.96% for payments paid with PayPal.

Can I use PayPal Credit to pay my federal income taxes over time?
Yes, qualifying U.S. customers can use PayPal Credit to pay federal income taxes over time to the IRS through payUSAtax.com, on tax payments of $99 or more. If you use this option, the IRS will receive your tax payment right away.

Check the offer’s details, Terms and Conditions here.

If you have any issues with the payUSAtax.com website, please contact them at (855) 508-0159 or by going to the Contact Us section of their website.

 
Here's how to set up PayPal Here to calculate taxes for your transactions.
  1. Log in to PayPal Here on your device and navigate to Settings and click Tax.
  2. Set Add Tax to Total to ON.
  3. Ensure that the New (default) tax rate matches the rate of your state.
  4. Click the + icon to add additional tax options.
  5. Initiate a test payment for $1.00.
  6. The tax rate should automatically be added to the total. If you select the tax, additional tax rates should be displayed.