NEW TAX LAW FOR ONLINE SELLERS
How does the new IRS legislation affect you?
Starting in 2011, United States Internal Revenue Code (IRC) Section 6050W states that certain payment processors, like PayPal, are required by the US Internal Revenue Service (IRS) to provide information about certain customers who receive payments for goods or services using their payment services. To help you understand how these changes may affect you as a non-US PayPal customer, we’ve prepared the following FAQs.
Questions? Log in to your account to contact us.
What is the IRS?
The Internal Revenue Service (IRS) is the US government agency responsible for tax collection and tax law enforcement. It has issued new legislation requiring all US payment processors, including PayPal (as the global PayPal service is, in part, US-based), to provide information about certain US customers who receive payments for the sale of goods or services.
What is the new legislation?
Under the new legislation of Internal Revenue Code (IRC) Section 6050W, we are required to report to the IRS the total payment volume received by US account holders and non-US PayPal account holders who are subject to US taxation, who process more than 200 payments for goods or services in the same year.
The new legislation applies to all US payment processors, including PayPal (as the global PayPal service is, in part, US-based); and to all sales that occur on or after January 1, 2011.
How are non-US PayPal accounts affected by this new law?
Internal Revenue Code Section 6050W requires PayPal’s non-US subsidiaries to comply with the new law. As a result, non-US PayPal account holders may need to certify their non-US status and their address. Holders of non-US PayPal accounts may declare that they are not a US person/business or are not subject to US taxation. US sellers using a non-US PayPal account may be required to provide a tax ID number (Social Security Number (SSN), Employer Identification Number (EIN), or Individual Tax Identification Number (ITIN)) for those accounts. If you have an account with one of PayPal’s non-US subsidiaries you may be contacted when you approach the IRS thresholds.
How will I know if IRC Section 6050W affects me?
PayPal will track the payment volume of your account(s) to check whether the volume goes above 200 payments for goods or services in the same year.
Before your payment volume exceeds the reporting thresholds, you may be asked to certify your non-US status or add your tax ID number, such as a Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN) or Employer Identification Number (EIN), to your existing account(s), if you don’t already have one on file.
Holders of non-US PayPal accounts may declare that they are not a US person/business or are not subject to US taxation.
If you cross the IRS thresholds in 2012, PayPal will send Form 1099-K to you and the IRS for the 2012 tax year in early 2013.
How do I know if I have “non-US status”?
Typically if you are a non-US citizen and are not living in the US, not legally a US resident, or you have a non-US business, this will apply to you. Non-US businesses generally include:
- Companies incorporated outside the US
- Partnerships, trusts, and estates registered outside the US
- Persons or legal entities that are not subject to US tax laws
PayPal can’t advise you on your tax status, so please consult with a tax professional if you are unsure whether you are subject to US taxation.
What does PayPal need from me as a result of the IRS changes?
PayPal will ask affected sellers to update their account(s) by verifying their non-US status, or providing a tax ID number, if they don't already have one on file. Your tax ID number is one of the following:
- Your Social Security Number (SSN)
- Your Employer Identification Number (EIN)
- Your Individual Tax Identification Number (ITIN)
Please use the guidelines below to determine which tax ID number to provide. You should use the tax ID number that you use when reporting any taxable income related to your PayPal activity to the IRS.
Business Entities with an EIN
Provide your company EIN and company name.
Sole Proprietors with an EIN
Provide your company EIN and your own name. Do not provide a business name or a DBA name (“Doing Business As”) with your EIN.
Individual Sellers and Sole Proprietors without an EIN
Provide your SSN or ITIN and your name. Do not provide a business name or DBA name with your SSN.
PayPal will also ask affected sellers to confirm that their account name matches the tax ID number provided and to confirm their physical address so that if Form 1099-K is issued, we can report your information accurately to the IRS.
Tax ID numbers will only be requested from sellers whose payment volume, in a single PayPal account or in multiple PayPal accounts when aggregated, approaches the IRS thresholds. If you need to update your information, PayPal will alert you when you log into the PayPal site, and display an alert in your Account Overview.
What happens if I don’t certify my non-US status or provide my tax ID number?
If you do not provide your tax ID number Social Security Number (SSN), Employer Identification Number (EIN), or Individual Tax Identification Number (ITIN) after we've requested it, we may need to place the following limitations on your account:
- You’ll be unable to receive funds into your account.
- You won’t be able to close your account.
The limitations will be removed after you verify your non-US status or provide your tax ID number.
Are personal payments that I receive counted in the total that will be reported to the IRS?
No. Personal payments that are not payments for the sale of goods or services will not be counted when determining if the IRS thresholds have been reached and will not be included on your Form 1099-K if you exceed the thresholds. However, all payments received for the sale of goods or services will be used to calculate the gross payment volume to be reported. PayPal monitors accounts to ensure that personal payments are not being used for sales of goods and services.
If I have multiple accounts which, when combined, meet the thresholds, but individually they don’t, will my accounts be affected?
Yes. PayPal and all other payment processors are required to determine if the IRS thresholds have been met and, if so, to report payment volume to the IRS by tax ID number such as a Social Security Number (SSN), or Employer Identification Number (EIN).
For example, if two accounts have the same tax ID number on file and have the payment levels shown below, PayPal will report both accounts on separate 1099-K Forms under the new regulation.
- Account A - 180 transactions for goods or services
- Account B - 30 transactions for goods or services
Are non-profit organisations affected by IRC Section 6050W?
For purposes of IRC Section 6050W, non-profit organisations are treated the same as for-profit organisations. Non-profit organisations will be required to submit their Social Security Number (SSN) or Employer Identification Number (EIN) before exceeding the payment volume thresholds. A Form 1099-K will be sent to non-profit organisations that exceed the thresholds for sales of goods or services.
Will I need to upgrade to a Business account?
If you have a Personal or Premier account and you provide an Employer Identification Number (EIN) to PayPal, you will be asked to upgrade to a Business account. If you have a Personal or Premier account and you provide a Social Security Number (SSN) to PayPal, you will not be asked to upgrade to a Business account.
Will all sellers receive a Form 1099-K?
No. Only sellers who exceed the IRS thresholds will receive Form 1099-K. Sellers exceed the IRS thresholds when they receive over 200 separate payments for goods or services in the same calendar year.
I didn't receive a Form 1099-K and thought I was supposed to. What should I do?
If you feel you crossed the thresholds for reporting and did not receive a Form 1099-K from PayPal:
- Log in to your PayPal account
- Click History
- Select Tax Documents from the drop-down
If a Form 1099-K was issued for your account, it will be listed here and available to download or print. If a Form 1099-K is not listed and you still feel that you should have one, contact PayPal for assistance.
How do I read Form 1099-K?
PayPal is working with its sellers to help them understand the new requirements. Please refer to the links section on this site for more information on the process and forms. Also, check back often for future information updates on this site.
How does PayPal calculate the dollar amount shown on the Form 1099-K?
The dollar amount shown on the Form 1099-K is your total gross sales for goods or services that were received through PayPal for the previous calendar year. As required by the IRS, this amount includes all fees and/or payments associated with your sales, including shipping fees or sales tax received.
As the dollar amount on your Form 1099-K is a gross amount, any adjustments for credits, cash equivalents, discounts, fees, refunded amounts or any other amounts will not be netted out.
How do I get a reconciliation report from PayPal?
To get a reconciliation report that shows all of the transactions PayPal has included in the dollar amount reflected on your Form 1099-K for the 2011 calendar year:
- Log in to your PayPal account
- Click History
- Select Reports from the drop-down
- Click 2011 Financial Summary and download the report
Why did I receive more than one Form 1099-K from PayPal?
PayPal and all other payment processors are required to report sales and transaction volume to the IRS by tax ID number. We will prepare Form 1099-K at the PayPal account level. If you have multiple accounts, that either individually or when combined, cross the thresholds, you will receive a Form 1099-K for each account associated with your tax ID number.
What if I have questions about my Form 1099-K?
If you have questions about your Form 1099-K, please review all of the information on this site. PayPal is not qualified to give you specific tax guidance and we recommend that you contact a tax professional.
What should I do if my business name or tax ID number is incorrect on my Form 1099-K?
To change the name listed on your Form 1099-K:
- Log in to your PayPal account
- Go to the Profile Section
- Click Change next to Name to change your business name (please note that there are restrictions on personal name changes)
- Click Change next to Business Information to change your business name
- In the description field, please include your request for a corrected Form 1099-K
To change the tax ID number on your Form 1099-K, call PayPal using the telephone number provided on your Form 1099-K for assistance.
What should I do if I feel the dollar amount shown on my Form 1099-K is incorrect?
If you feel the dollar amount on your Form 1099-K is incorrect, you can access a reconciliation report for your accounts on the Tax Documents section of the website.
If the dollar amount seems high, please note that:
- Shipping income IS included in the total
- Refunds and returns have NOT been excluded from the total
If the dollar amount seems low, note that:
- It only includes gross sales for goods or services that were processed through your PayPal account
- Transactions processed after 31 December are NOT included on the prior year’s Form 1099-K, but will be reflected in the next year’s Form 1099-K.
- We only report your PayPal activity. Other payment methods are not included.
If you feel a correction is needed to your Form 1099-K, contact us for assistance using the telephone number provided on your Form 1099-K.
Will PayPal help me with my tax return?
While we're committed to helping our customers understand the tax changes, PayPal is not qualified to and cannot give you specific tax guidance. Please contact a tax professional.
Is PayPal planning to make any changes to the IRS reporting process during 2012?
This is a new law and the IRS may issue additional guidance over time. As a result, we may make changes to this process during the year. In addition, certain aspects of this new law do not take effect until 2013. We will communicate any changes required by these new provisions throughout 2012.
Will the information I provide be protected?
PayPal always takes prudent and advanced measures to protect your information. PayPal automatically encrypts your confidential information in transit from your computer to ours using the Secure Sockets Layer protocol (SSL) with an encryption key length of 128 bits (the highest level commercially available). Before you even register or log in to our site, our server checks that you’re using an approved browser – one that uses SSL 3.0 or higher.
Once your information reaches us, it resides on a server that is heavily guarded, both physically and electronically. Our servers sit behind an electronic firewall and are never directly connected to the Internet.
Please note that when you provide your information to PayPal, you will be consenting to that information, and certain other account information, being provided to the IRS by PayPal (as required by the IRS).