Avoid Tax Ramifications by Ensuring Your PayPal Transactions Aren’t Accidentally Taxed

Paypal app, Sint-Pieters-leeuw, Belgium - 27 Aug 2020
Isopix / Shutterstock.com

There’s some misinformation circulating on social media right now. A specific post resembling a store sign or printed notice claims you can avoid paying taxes on PayPal and Venmo transactions if the sender simply writes “gift” or “reimbursement for…” (something like a meal or movie tickets) when they send the money. But it’s important to understand that comments in the notes section of either service won’t trigger a 1099-K form to be generated if you receive more than $600 in money throughout 2022.

On the other hand, they also can’t be used to prove the money is not a business transaction. It’s how the recipient sends the money that makes a difference. So, how can you avoid having personal transactions between friends and family taxed if you’re using PayPal?

When you send money in PayPal, you will first select the recipient by typing in their name or email address. Then, you enter the amount you want to send. Once you hit continue, you will see an option that says, “Sending to a friend.” Make sure you see those words. If it says, “Paying for an item or service,” you’ll want to click “change” and select “Sending to a friend.”

If you receive money from a friend and they forget to change the settings, you can “decline” the payment. Contact them and ask them to process the payment as friends and family, instead.

If you accidentally send a friend money and forgot to select “Sending to a friend,” reach out before they accept the transaction and ask them to decline. If you don’t reach them in time, they can request a refund, but you will still have to pay fees on the transaction.

Make Your Money Work For You

If you are a small business owner, it’s important to remember that it’s against PayPal’s terms of service to request that customers pay you using the “friends and family” option to avoid fees or tax paperwork. If you do, the PayPal User Agreement warns, “PayPal may remove your PayPal account’s ability to accept payments from friends or family members.”

Small business owners, gig workers, and anyone who sells items and accepts PayPal as a payment method, such as Facebook marketplace sellers, should be prepared to receive a 1099-K form in 2022 if their total transactions reach or exceed $600 in funds received.

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