IRS puts more scrutiny on online sellers — a Q-and-A with PayPal’s Eddie Davis - SmartBrief

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IRS puts more scrutiny on online sellers — a Q-and-A with PayPal’s Eddie Davis

3 min read

Modern Money

Starting with the 2011 tax year, the Internal Revenue Service will be paying extra attention to online sellers to make sure Uncle Sam is getting his due on their income. The new tax law is Section 6050W of the Internal Revenue Code and was signed into law on July 30, 2008, as part of the Housing and Economic Recovery Act of 2008 and is set to affect individuals as well as small and midsize businesses that sell online.

Eddie Davis, senior director of SMB merchant services for PayPal, one of the large companies that is required to assist its customers in reporting under the law, took the time to tell SmartBrief more about the law and who needs to be aware of it.

To whom does the law apply?

It applies to all sellers — whether they are individuals or businesses — receiving more than $20,000 in gross payment volume and making more than 200 transactions in the tax year. It applies to sales made on or after Jan. 1, 2011.

If a seller’s payment volume exceeds both of these thresholds, PayPal will send them a Form 1099-K electronically or by snail mail for the 2011 tax year in early 2012. Starting in 2011, PayPal will contact sellers who approach the reporting thresholds with instructions on how to proceed.

Is this a change to what online sellers are expected to pay in taxes, or just another way for the IRS to check that people are paying what existing laws require them to pay?

The IRS has always required online sellers to report their online income; however, IRC 6050W provides the IRS with another source of information about how much income online sellers who meet the reporting thresholds are making.

What penalties could sellers face if they aren’t reporting their sales and paying the appropriate taxes?

Sellers who meet the reporting threshold but do not report their online sales may face penalties from the IRS, and PayPal may be compelled to place restrictions on their accounts.

What is PayPal doing to help its users adjust to this change, and what changes will users face in terms of their experience using PayPal as a result of the new law?

PayPal is committed to helping sellers stay informed about the tax law changes and to simplify the process so that businesses can continue to grow online. PayPal will contact sellers who approach the reporting thresholds in 2011 with instructions on how to proceed. For sellers who pass the $20,000 and 200 transaction thresholds, PayPal will report their online income to the IRS, and sellers will receive a 1099-K form from PayPal which they can refer to when filing their tax return.

We want our sellers to be as informed as possible about the law, so we launched a website with details about how IRC 6050W will affect sellers’ accounts. We’ll continue updating the site to answer any new questions that arise, and sellers can also check out the @PayPalSMB Twitter handle for updates or visit the PayPal Community Help Forum.

In addition to PayPal, what other companies have to comply with the new law?

All online-payment processors are affected by the legislation and are compelled by law to report the income of sellers who meet the 200 transactions and $20,000 in payment volume threshold.

Image credit, robynmac, via iStockphoto