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Paypal Loophole is Going Away

By
Education & Training with Number Cruncher LLC

The focus of our practice is helping individuals and businesses resolve their IRS tax problems in the Las Vegas, Nevada, St. George, Utah areas, and elsewhere.   However, we also like to educate taxpayers to help them avoid an audit, or if they get audited, the IRS doesn't find anything to charge them extra tax, penalties, and interest on.  

 

Today's blog explains a loophole with PayPal that the IRS is getting rid of.  This loophole is going away in a little over six months from now.

You may remember the strategy where you can avoid giving 1099s to contractors and vendors when you use PayPal or a similar service as your payment platform.  With this strategy, you push the reporting requirements to PayPal. Current federal law requires that PayPal file Form 1099-K with the IRS and send it to you when:

  1. Your gross earnings are more than $20,000, and
  2. You have more than 200 transactions.

Example. You work as a consultant. Your clients pay you $30,000 via PayPal. PayPal does not give you a 1099-K because this fails the more than 200 transactions in a calendar year test.

According to lawmakers, this created a situation where those people who use PayPal have an easy ability to cheat (i.e., not report the income on their tax returns).

Starting January 1, 2022, the American Rescue Plan Act kills the two-step “more than $20,000 and more than 200 transactions” threshold for third-party settlement organization (TPSO) filing of 1099-K and replaces it with the single “$600 or more” reporting threshold.  The Joint Committee on Taxation estimates that this change in the 1099 rules will gain more than $8 billion in new taxes over the next 10 years with this change.

Several states have already closed this reporting loophole on the state level: 

  • Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year. 
    Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions).
  • Arkansas has a $2,500 threshold.
  • Missouri has a $1,200 threshold.

The bottom line is, if you have used this loophole, starting in the year 2022, you will not be able to hide income from the IRS by using PayPal.  This is going to make your taxable income higher.  This would be a good time to visit with your tax preparer so he/she can help you with some tax-saving strategies.

If you or someone you know is dealing with IRS problems, contact me at 702-469-9426 or candy@numbercruncherllc.tax.

 

Comments (8)

Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Thanks Candy for the great information that you are passing on to us here in the rain.  Hope you have a great day!

 

Jun 29, 2021 09:29 AM
CANDACE (Candy) STEVENS, EA
Number Cruncher LLC - Overton, NV
Helping Taxpayers Resolve IRS problems

Hello Will Hamm.  You are very welcome!  I hope that the information helps you in some way!

Have a Happy Day!

Jun 29, 2021 09:45 AM
Ron and Alexandra Seigel
Napa Consultants - Carpinteria, CA
Luxury Real Estate Branding, Marketing & Strategy

Candy,

That is an interesting loophole.  A recent independent contractor told us he accepts Pay Pal, and we paid by check.  For a while in the beginning we used Pay Pal, and after a barrage of spam emails claiming that we owed vendors we never heard of, we cancelled our account...and we are not interested in reviving it ever again.  A

Jun 29, 2021 09:59 AM
Mark Don McInnes, Sandpoint-Idaho
Sandpoint Realty LLC - Sandpoint, ID
North Idaho Real Estate - 208-255.6227

This is very interesting.  Surprised this slipped by for any time at all.  Always something to watch for.  Mark

Jun 29, 2021 05:14 PM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Very interesting, Candy. Had no clue what you were talking about when I saw your title. I have no accounts with PayPal so all this "passed" me by.

Jun 30, 2021 05:02 AM
CANDACE (Candy) STEVENS, EA
Number Cruncher LLC - Overton, NV
Helping Taxpayers Resolve IRS problems

Good Morning Ron and Alexandra Seigel.  Yes, it is a very interesting loophole.   I am surprised the IRS let it go this long.  I have a love-hate relationship with Paypal.

Have a happy day!

 

Jun 30, 2021 09:53 AM
CANDACE (Candy) STEVENS, EA
Number Cruncher LLC - Overton, NV
Helping Taxpayers Resolve IRS problems

Good Morning Mark Don McInnes, Sandpoint.  I am surprised as well the IRS let this one slip by for so long.  

Have a Happy Day!

Jun 30, 2021 09:54 AM
CANDACE (Candy) STEVENS, EA
Number Cruncher LLC - Overton, NV
Helping Taxpayers Resolve IRS problems

Good Morning Nina Hollander, Broker.  I had no idea about this loophole either until I read about the loophole being closed.  I guess it's because I am not looking for ways to cheat the government?

Have a Happy Day!

Jun 30, 2021 09:55 AM