Tax Memo – Paypal Year End Tax Form Upload Requirements (IRS Forms 1099K & 8832)

I have been getting a lot of calls, texts and emails from Paypal users, alarmed by some wording on the paypal site related to 1099K issuance and Paypal’s requirements for certain forms, especially form 8832, which is an Entity Classification Election, to be uploaded to their tax department.

Before I start, I wanted to describe exactly what the forms discussed in the memo are.

What is an IRS Form W9?

A W9 form is used when you have to provide your name or company name, and your social security number or federal ID number, to a company, that is going to pay you. 

In this case, Paypal requires businesses that use their platform to provide them with this information in case they need to prepare a 1099K for you at the end of the year.

What is an IRS Form 1099-K?

Any third-party payment networks such as PayPal or Venmo, will issue a 1099K to any vendor that earns more than $600.00 on their platforms. The total earned for the calendar year will be shown on the 1099K you receive. 

The amounts shown on the 1099K must be reflected as income on your company’s tax return. 

What is an IRS Form 8832? 

Very few businesses fill out a form 8832. So, if you never filed one, it’s probably because you never were required to.

This is only used when a business owner wants to change their entity classification from the original one it was set up for.

For example, a single member LLC would normally file a Schedule C or Schedule E form within their 1040 filing. 

If that sole member LLC owner wanted to be treated as an S Corp, they would use form 8832 to request that election with the IRS. Again, very few companies do this, maybe 1 in a thousand.

So the platforms, like PayPal or venmo, fill out the 1099-K in your name or your company’s name, and send copies to the IRS, the states and you at the end of the year.

The objective is to ensure people report their business income on their tax returns.

Here is the link to the page from the PayPal help website where these issues are mentioned.

https://www.paypal.com/us/smarthelp/article/how-will-paypal-use-my-tin-faq3174

The issue here comes about when, for some reason, Paypal cannot verify the information you gave them on a W9 form with the IRS.

This italicized language directly below, is at the end of that help page and is where the form 8832 is mentioned.

Then, if necessary, we’ll send you a Form 1099-K in January per IRS reporting requirements. If you’ve already entered your Tax ID Number, you may have received a notification if the information doesn’t match IRS records.

Log in to confirm that it’s correct.  

Sole proprietors and single-member LLCs: When confirming your taxpayer status, enter your individual name as it appears in line 1 of your 1040, 1040A, or 1040EZ. If you’d rather provide your Employer Identification Number, submit your Form W-9 together with proof of filing a Form 8832 with the IRS to taxdocumentsupload@paypal.com to ensure that what we enter on your Form 1099-K matches IRS records.

This situation could lead many sole proprietors or sole member LLC owners to believe that they need to file an 8832 form in order to comply with the PayPal requirements in this situation. This is most of the time not true. I want to make sure that only people that truly need to file an 8832 are going to do so. 

If you recall above, I mentioned that it is very rare when a person has to file an 8832 with regard to their company. To refresh you, the 8832 is meant to elect a different entity status for your company. The best example is a sole member LLC may want to be treated like a corporation. If that’s the case, that is when you would use this form.

99.9% of sole member LLC (who file a Schedule C or E) or multi-member LLC (who file form 1065 as a partnership) DO NOT NEED TO FILE a form 8832 and have not in the past.

I’m working with the PayPal tax department right now on helping them understand exactly what they should be asking for and when. The Paypal help wording that I reprinted here would make people believe that there might be a need to file a form 8832 when again, it is rarely necessary. 

Now, if have filed an 8832 to change your entity classification, I still don’t believe that is the form you should uploading to prove it. You want to upload the letter from the IRS that shows approval for the entity type change.

So as usual, if you come upon this situation and you’re not sure what to do, or have any tax or accounting questions, call me immediately on 732-673-0510.

Don’t let your nervousness have you file the form 8832 as this could create a domino effect of problems that will need to be undone in the IRS system. And we all know how easy it is to get the IRS to get things done for us!