IRS changes for 2012 and your PayPal account

Do you get payments from PayPal? If you do, the IRS has your number. That number being the amount of money you received from PayPal. What does this mean for you? If you are not subject to US taxes, it doesn't mean anything. If you do have to fill out a US federal tax return, then this means that the US government knows how much you received from PayPal and may be upset if you don't pay your taxes.

Who has to pay US taxes?
For individuals, if you are not a US citizen and did not live or conduct business in the US, then you don't pay US taxes, even if you received income from the US (either directly or through a third party payment processor like PayPal). The situation is similar for companies. If your company has no presence in the US, it typically is not subject to US taxes. If you don't fit into these categories, then you have to pay attention to US tax laws and regulations.

What's changed for 2011?
Starting in 2011, third-party payment providers like PayPal (as well as credit and debit card payment processors) were required to report to the IRS payments made to individuals and businesses.

How is this different from before?
The only difference is in who reports payments to the IRS. For example, if you ran a web site and had some kind of affiliate or advertising relationship with some company, and that company paid you using PayPal, that company may have been required to send you an IRS form (typically a 1099-MISC form) that summarized your total received payments from the previous year. Now, that company doesn't have to send you any IRS summary form, PayPal would do that now.

In previous years, the company that sent you payment using PayPal was typically required to both report those payments to the IRS, and send you a 1099 form if the total payments in the previous year was more than $600. Now, that company is no longer required to send that information to you or to the IRS.

How does this affect you?
There will be no change if you or your business are not subject to US taxes. For everyone else, there will be no change if you have always followed appropriate IRS regulations for reporting income and expenses. If you are subject to US taxes, and have not reported income in the past, then the only change is that PayPal will tell the IRS how much you were sent, and it will be more likely that you will get penalized by the IRS for not reporting your income.

What do you have to do?
If you are subject to the new reporting requirements, your payment processor (PayPal, Google Checkout, etc.) will contact you and request information such as your name and tax identification number. If you don't provide this information, that processor may withhold some of your payment for tax purposes. If you do provided all the required information, you may be sent an IRS form 1099-K that summarizes your payments that you received from that processor.

How will this affect your taxes?
If you had done proper accounting and reporting of your income and expenses before, then this new reporting requirement won't change your taxes at all. If you have not been reporting your income in the past, then you may have to pay more taxes (or even fines for under reporting income). If you have not taken the time to treat your activity as a business, now would be a good time to start. If you are self employed or run a small business, you may want to check out some of the appropriate IRS resources. If you are in a large business and are responsible for dealing with accounting and tax issues, then you should review your procedures to make sure that this change in the IRS rules has been addressed.

Other Resources
IRS Third Party Reporting Information Center
IRS Small Business and Self-Employed Tax Center

Disclaimer: This article contains general information about US tax laws and regulations and does not constitute legal, tax, or professional advice. If you have questions about these issues, please seek out the services of appropriate professionals or information from authoritative sources.