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Here in New York, how do I go about paying taxes on PayPal? For example, suppose I start out a month with a PayPal balance of $0. The first week of the month, I earn $500 selling advertising space on DaniWeb which goes into my PayPal balance. I never withdraw anything. The third week of the month, I spend $150 purchasing ad space on another website, which comes directly from my PayPal balance. At the end of the month, I direct deposit the $350 I have into my bank account. According to the U.S. government, did I just make $350? Or did I make $500? I only ever saw $350 of it. Does a PayPal balance count as real money or does it not count as real money until it is in the form of a check or ends up in your bank? I have heard people consider a PayPal balance simply a form of online credit that is associated strictly with the paypal.com service. In other words, it isn't real money until you withdraw from PayPal.

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Short answer: money credited to your PayPal account is treated like money made available to you for tax purposes — it’s taxable when you (actually or constructively) receive it, not only when you transfer it to your bank. That means in your example the $500 is gross receipts and the $150 you spent for business advertising is a deductible business expense, leaving $350 of net income to be taxed. (irs.gov)

A few practical clarifications that expand on earlier replies from , and : don’t rely on whether a third‑party sends you a Form 1099‑K to decide what to report. The IRS has changed reporting rules recently and platforms may or may not issue forms depending on the year and thresholds, but the tax rule itself hasn’t changed — report all taxable income even if no form arrives. For current filing/reporting thresholds and transition guidance see the IRS Form 1099‑K resources and notices. (irs.gov)

If your question about sales tax (as raised by and discussed by ) is about buying on eBay: the 2018 Supreme Court decision in South Dakota v. Wayfair allowed states to require remote sellers or online marketplaces to collect sales tax, and many states (including New York) have adopted rules treating marketplace providers as collectors in certain cases. That means sellers, marketplaces, or buyers can have obligations depending on the facts — not the old “mail‑order never taxed” rule. For New York guidance see the state advisory opinion on marketplace providers. (supreme.justia.com)

What to do now (short checklist to send to an accountant or keep for your records):

  • export PayPal activity for the year (CSV) and reconcile incoming payments vs refunds/chargebacks;
  • mark each transaction business vs personal;
  • capture invoices/contracts for services sold and receipts for business purchases (including PayPal fees);
  • track transfers to bank separately (don’t use withdraw date to decide taxable year unless accounting method differs);
  • keep any 1099‑K, but treat it as informational — reconcile it to your books.

If you run a business or have substantial PayPal activity, get a quick consult with a tax pro — rules and filing thresholds have changed in recent years and state sales‑tax duties can be surprisingly specific.

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All 11 Replies

Member Avatar for dazzlindonna

I'm certainly no tax person, but if you spent the money on web hosting, then it was real money, was it not? You can't spend it if you don't have it, right? Anyway, you can claim the hosting expense as an expense so it all comes out in the wash. I'd ask a tax person if I were you, but I think *legally* you'd need to claim the income, but you could then also claim the expense.

Member Avatar for Dani

Well, everything I earn/spend via PayPal is to/from an individual person for a service. Similar to if I were to pay a friend $50 cash to help me out in something.

Member Avatar for senterstyle

Well, technically there is no actual "money" involved in PayPal accounts. PayPal is just a running total of how much one account was given from another and vice versa. It isn't until someone "cashes out" that money is actually "made and moved." PayPal is not a bank. Thus, their accounts are not federally insured, etc.

I have heard people consider a PayPal balance simply a form of online credit that is associated strictly with the paypal.com service. In other words, it isn't real money until you withdraw from PayPal.

So, basically, that is correct.

Member Avatar for Tekmaven

Alright, my father is a Certified Public Accountant in New York State. While he doesn't have time to write a response, this is his view on it:

Once the money hits your paypal account, it's your income. It doesn't matter how long you wait to withdraw it, or even if you never writhdraw it; becuase YOU choose when it can come out of the paypal account. It isn't like paypal is saying, "You can't withdraw your money for 6 months". If that were the case, there might be some question about if you had income or not. Bottom line: once money hits your paypal account, it counts as your income.

The IRS requires you to report your income gross, before your expenses. Then you may deduct your expenses to arrive at your net income, so therefore you would have $500 of income, less $150 of advertising expense, and a net income of $350. If you are not a corporation, you would be required to report this on your Form 1040 Schedule C, titled "Profit or Loss from Business". You would also have to complete Form 1040 Schedule SE, titled "Self Employment Tax," which is social security taxes on your net income for $400 or more. In addition, other expenses might be deductable, such as the cost of internet access, cost of your computers, part of your electric bill, etc.

My dad suggests you consult with a professional tax advisor for more in-depth information ;).

Member Avatar for Dani

OK Cool. Thanks :) The reason I wasn't sure was because one can have a PayPal account without ever being connected to a bank account or ever withdrawing any money at all. In such a case, PayPal acts simply as an online bartering system.

What I am going to do is just print out all of my PayPal history and send it off to the family accountant :)

Member Avatar for Tekmaven

Well, you can't really do that either. You need to make a spreadsheet on which transactions you got as income, and which transactions you made paying for business deductions..

Member Avatar for dataware

Hi everyone,

I am in Canada.

I know for a fact that both the IRS and world revenue services are indeed cracking down on paypal clients.

Mostly accounts generating over 10 000.00 in cash flow.

Replies are mostly correct. Keep track of income // expenses ... and if you have a small balance or large balance at year end, simply declare it.

If you have a negative balance, be prepared to declare it against future years income.

In a nut shell, each individual case is different and should be consulted by a proffesional.

All the best,
Lorenzo
Dataware

Member Avatar for Johnny Wolf

I have a question kind of related to this. What if a person buys an Item on E-Bay.The seller lives in New York and the buyer lives in California. The buyer makes the purchase via Pay Pal and is not charged sales tax. Or is he/should be? Could you get in trouble with IRS at a later time?

Member Avatar for OurNation

I don't think e-bay charges taxes (do they?) but I don't think you would get in trouble.

Member Avatar for jwenting

Out of state mailorder purchases in the US are not subject to salestax.
Online purchases at the moment count as mailorder (there are plans to change that).

The seller of course has to declare his income from the purchase towards his income taxes (there may be a lower limit for this).

EBay themselves act only as an intermediary, they don't charge any taxes. Nor do other auction houses (though some do handle government taxes for the buyer and seller, acting as a clearinghouse for those).

Member Avatar for selfhelpebooks

I would imagine an accountant or tax specialist would be of assistance.

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