Hello,

I have a question about the new PayPal rules and taxes. (I am referring to the new $20,000 and 200 transactions rules that mean we have to pay taxes.)

If I share the account with a family member, how will we pay taxes on it? The family member earns half the money in it, and I earn the other half. How are we going to separate everything if PayPal has already confirmed they will only send one 1099-K?

“If I share the account with a family member, how will we pay taxes on it? The family member earns half the money in it, and I earn the other half. How are we going to separate everything if PayPal has already confirmed they will only send one 1099-K?’--->In general, the revenues that small businesses, like yours, receive through the payment processors,i.e., credit /debit cards or Paypal etc. have not been readily visible to the IRS. Starting in 2011, the gross amount of payment card and third-party network transactions will be recorded on a new IRS form, form 1099-K. As long as there are joint owners (other than husband and wife) you technically have a partnership as far as the IRS is concerned and they would normally want it reported on the 1065 and do K-1s. As a practical matter, it is not unheard of (although technically wrong) to divide the expenses and income and have each report their portion of income and expenses on your own schedule Cs and Sch SEs and pay SE tax respectively. To avoid any problems with the IRS computer matching, you need to report the full amount of the 1099K under the person whose SSN is on it. Then take a commision or independent contractor deduction for half or whatever percentage the other person is reporting. If you do this and it is over $600 the first person should issue their own 1099-MISC to the other person. The most correct procedure is to have the 1099K recipient issue a 1099K to the other payee. A husband and wife do NOT issue a 1099MISC to each other, but it's not incorrect to do so either.

Thanks for the quick response. This was not an issue in the past because we received separate 1099-MISC forms from the people who paid us (we are both freelancers), so we would report our taxes and pay them that way.

Another question:

How would we prevent double-reporting? For example: I am getting a 1099-MISC for my freelance work, and it is being paid through PayPal. PayPal is now going to send me a 1099-K for the exact same amount. It will look like I have earned twice as much, but in reality it's just being reported twice. Since I have to show both forms on my tax return, how would I tell the IRS that it is the same money being reported twice?

“How would we prevent double-reporting? For example: I am getting a 1099-MISC for my freelance work, and it is being paid through PayPal. PayPal is now going to send me a 1099-K for the exact same amount. It will look like I have earned twice as much, but in reality it's just being reported twice. Since I have to show both forms on my tax return, how would I tell the IRS that it is the same money being reported twice?”---> As said previously, starting in 2011 , certain payments for goods and services paid by credit card or third party merchants will now be reported to the IRS via a new form 1099K, Merchant Card and Third-Party Payments. I mean paypal and other online credit card processing merchants will begin filing a form 1099k for 200 transactions and over $20,000 to report the income to the IRS. The IRS believes that many online sellers fail to report their transactions. Some don't report because they mistakenly believe that Internet sales are invisible. Others do so because they are trying to evade taxes.The IRS has found that using information returns, such as W-2 forms for employees, Form 1099-MISC for independent contractors, and Form 1099-INT for bank interest, goes a long way toward improving the reporting of income. IRS computers can match income reported on these information returns (on paypal’s 1099K)with the income reported on your 1099MISC( your ER sends both 1099MISC and 1096 to the IRS) that you report on your tax return on 1040 line 12 from Sch C line 31 as a sole proprietor, an IC, I mean, NOT 1065 filer.

Thanks for the reply.