New Tax Reporting Rules Start in 2022 for Payments by PayPal and other Third Party Payment Providers

Right now the IRS doesn't know about many payments made by PayPal or similar service. This all changes in 2002 when new tax reporting rules go into effect.

If you work as an independent contractor and are paid through PayPal or by a similar third party settlement organization, are an Airbnb host, or sell goods on eBay, Etsy, or similar websites, you need to know about a little noticed changed in the tax reporting rules that goes into effect in 2022. Because of this change, it will be harder than ever to hide income from the IRS.

Third-Party Information Reporting

The IRS has a series of forms beginning with the numbers 1099 that financial institutions, employers, and businesses are supposed to file to report various types of payments to the IRS. The IRS matches the figures on these information returns with the amount reported on the recipient's tax return to determine if underreporting occurred.

If you're an independent contractor, your payments get reported to the IRS one of two ways. First, if you're paid over $600 during the year by check, cash, money order, or direct deposit, the business that hired you is supposed to file IRS Form 1099-NEC with the IRS reporting the payments (Form 1099-NEC replaced Form 1099-MISC in 2021).

However, if you're paid through a third party settlement organization (TPSO) like PayPal, the payor need not report the payment to the IRS on Form 1099-NEC. Instead, it's the TPSO's responsibility to file a different form called Form 1099-K with the IRS.

But there is a big whole in 1099-K reporting. Under current law, a 1099-K need be filed only when the annual payments to the recipient total more than $20,000 and there are more than 200 transactions. As a result, many payments go unreported. If you have less than $20,000 in payments and/or 200 transactions, the IRS will have no report of the payment. However, you're still supposed to report the income on your tax return.

Example: Jane is a consultant who bills a client $5,000 for consulting services during 2021. Her client pays her by PayPal. The client need not file Form 1099-NEC to report the payment to the IRS. PayPal need not file a 1099-K reporting the payment because Jane has less than 200 PayPal transactions for 2021.

These rules apply not only to independent contractors who bill clients directly, but to those who obtain clients through online hiring platforms like Upwork (or Uber, Lyft, Handy and many others). These online platforms often serve as TPSOs themselves or use PayPal or similar third party TPSOs.

The same goes for short-term rental hosts who use online platforms like Airbnb and VRBO to book and bill their guests. Likewise for online platforms used to sell goods like eBay and Etsy.

1099-K Reporting Hole Closes Starting 2022

However, the 1099-K reporting hole is about to close. Starting January 1, 2022, the $20,000/200 transaction rule comes to an end. Instead, a 1099-K will have to be filed by a TPSO like PayPal if a recipient is paid $600 or more during the year for goods and services, with no minimum number of transactions requirement. Thus, even a single transaction for $600 or more will require a 1099-K.

Example: Assume that Jane from the example bills her client $5,000 in 2022 and the client pays her by PayPal. The client stlll need not file Form 1099-NEC to report the payment. But PayPal must file Form 1099-K reporting the $5,000 to the IRS because it exceeds the $600 threshold.

Many millions additional forms 1099-K will have to be filed starting in 2023 to report payments made in 2022. However, don't worry about a 1099-K getting filed if you use PayPal or a similar service to reimburse friends or relatives for expenses or make charitable contributions. 1099-K forms need only be filed for transactions for goods and services.
Also, starting in 2022, expect PayPal or other TPSO you use to ask you for your taxpayer identification number (TIN) (your Social Security number or Employer Identification Number). If the TPSO fails to get your TIN, it will have to withhold 24% of your payments over $600 and send the money to the IRS--a process called backup withholding.

Talk to a Tax Attorney

Need a lawyer? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
Get Professional Help

Talk to a Tax attorney.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you