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

In the past, the IRS often didn't know about payments made through PayPal or similar services. But in 2002, new tax reporting rules took effect.

By , J.D. USC Gould School of Law
Updated 4/12/2024

If you work as an independent contractor and get paid through PayPal or a similar third-party settlement organization, are an Airbnb host, or sell goods on eBay, Etsy, or another website, you need to know about a little-noticed change in the tax reporting rules that went 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 number "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 doesn't have to report the payment to the IRS on Form 1099-NEC. Instead, the TPSO has to file a different form called "Form 1099-K" with the IRS.

Third-Party Information Reporting Before 2022

Before 2022, 1099-K reporting had a big hole. Under the law at the time, a 1099-K needed to be filed only when the annual payments to the recipient totaled more than $20,000 and there were more than 200 transactions. So, many payments went unreported. If you had less than $20,000 in payments and less than 200 transactions, the IRS would have no report of the payment. But you were still supposed to report the income on your tax return.

Example. Janelle is a consultant who billed a client $5,000 for consulting services during 2021. Her client paid her by PayPal. The client didn't have to file Form 1099-NEC to report the payment to the IRS. PayPal didn't have to file a 1099-K reporting the payment because Janelle had fewer than 200 PayPal transactions for 2021.

These rules apply to independent contractors who bill clients directly and to those who get 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 Closed As of 2022

The 1099-K reporting hole closed in 2022. Starting January 1, 2022, the $20,000/200 transactions rule ended. Instead, a TPSO, like PayPal, has to file a 1099-K if a recipient is paid $600 or more during the year for goods and services, with no minimum number of transactions requirement. So, even a single transaction for $600 or more will require a 1099-K.

Example. Assume that Janelle, from the example above, bills her client $5,000 in 2022, and the client pays her by PayPal. The client doesn't have file Form 1099-NEC to report the payment. But PayPal must file Form 1099-K reporting the $5,000 to the IRS because this amount exceeds the $600 threshold.

Many millions of additional forms 1099-K had to be filed starting in 2023 to report payments made in 2022. But 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 only have to be filed for transactions for goods and services.

Also, as of 2022, expect PayPal or any other TPSO you use to ask 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."

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