Does PayPal Report to the IRS? All You Need to Know About PayPal Tax Reporting

If you use PayPal to get paid for business, freelancing, e-commerce sales, or any income-generating work, it’ll report eligible payment activity to the IRS using Form 1099-K. 

This form is part of the IRS’s effort to track income earned through payment apps and third-party processors, especially now that more businesses get paid online than ever before.

However, PayPal doesn’t report every single transaction, and it’s not meant for casual personal transfers like splitting rent, paying a friend back, or receiving a birthday gift.

In general, PayPal IRS reporting applies when:

• You’re receiving money for goods and services

• Your account activity crosses certain reporting thresholds

• PayPal identifies the payments as business-related income

And even if you receive a 1099-K, it doesn’t mean you owe taxes on the full amount shown. The form reports gross payments, not your actual profit after refunds, fees, or expenses.

That’s why you need a setup that’s clean, compliant, and built to scale with doola, ensuring your business is structured correctly, your tax setup is clean, and your compliance doesn’t fall apart as you scale.

In this blog, we’ll break down all the details: does PayPal report to the IRS, what Form 1099-K includes, which transactions are tracked (and which aren’t), and how to stay tax-compliant.

What Is Form 1099-K and Why Does It Exist?

Form 1099-K is a tax form used to report payments you receive through third-party payment platforms like PayPal, Stripe, Square, and other processors.

Think of it as an annual summary of the money you received from a payment processor for goods and services.

So, when people say “PayPal 1099-K,” they mean the 1099-K form PayPal may issue to certain users based on their account activity and reporting thresholds.

Who issues Form 1099-K?

Form 1099-K is issued by payment settlement entities, also known as third-party payment processors. 

PayPal IRS reporting falls into this category because it processes card payments and online transactions between buyers and sellers.

So, instead of your client or customer sending you a tax form, PayPal becomes the reporting middleman.

The payment platform reports eligible payment activity to the IRS, even if you never invoice the customer directly.

What types of payments does a 1099-K track?

Form 1099-K is for income-generating activity, not casual personal payments. It generally tracks payments that are classified as commercial transactions, such as:

• Payments you receive for goods and services

• Online store sales from Shopify, WooCommerce, Etsy, etc.

• Freelance payments for client work

• Digital products, consulting, coaching, or services

• Card payments processed through PayPal checkout

Why does the IRS require Form 1099-K?

Many entrepreneurs earn money through freelancing, e-commerce, marketplaces, and subscription businesses that don’t appear on payroll or in traditional employer reporting. 

The IRS requires Form 1099-K to make sure income earned through payment processors is properly reflected on tax returns.

However, the amount shown on a 1099-K is not the amount you owe taxes on. That’s because a 1099-K usually reports gross payments without subtracting business expenses.

So, yes, PayPal may report a large number to the IRS, but your taxable income is based on what’s left after legitimate business deductions and expenses.

That’s why you need an automated bookkeeping system in place to record business expenses to accurately calculate the taxes you owe.

When Does PayPal Report Your Transactions to the IRS?

The question most business owners and freelancers really ask is When does PayPal send a 1099-K?

Let’s break down the PayPal tax reporting requirements in a way that’s actually easy to understand.

1. Federal reporting thresholds (dollar amount + transaction activity)

At the federal level, PayPal reports eligible payments when your account exceeds an IRS-set reporting threshold.

Earlier, 1099-K reporting used a combination of:

• Total payment volume (a dollar amount)

• Number of transactions (transaction count)

The One Big Beautiful Bill Act of 2025 restored the previous federal reporting threshold for Form 1099-K. 

This means you’ll get a 1099-K if you receive more than $20,000 and 200 or more transactions for goods or services in a calendar year.

PayPal doesn’t automatically report every user. It reports accounts that cross the threshold for that year and have eligible “goods and services” payments.

However, in recent years, the IRS has moved toward a lower threshold for more visibility into online income, especially for side hustles, freelancing, and e-commerce.

That’s why you’ll see different numbers mentioned online depending on the year, the IRS rule updates, and what type of payments you received.

2. How thresholds differ by year (why it gets confusing)

A big reason people get mixed up is that 1099-K rules have changed and been updated over time, and the IRS has adjusted enforcement and rollout timelines.

Don’t rely on random numbers from old articles. If you’re receiving money through PayPal for business activity, assume it can be reported, and keep your records clean from day one.

Because even if PayPal doesn’t send you a 1099-K, you’re still legally required to report taxable income.

3. State-level variations (some states have lower thresholds)

A few states have their own 1099-K threshold amounts that are lower than the federal threshold. 

So, even if you don’t hit the federal threshold, PayPal may still issue a 1099-K due to state-level reporting requirements. This is why two sellers can have the same PayPal revenue, but only one gets a form.

If you operate across multiple states (or sell nationwide), this becomes even more important because reporting rules and compliance expectations can vary.

You can contact the state tax agency where you live or do business to see if your state has a lower threshold.

4. Business accounts vs personal accounts (what matters more than the label)

A lot of people assume PayPal only reports business accounts, but in reality, what matters more is the type of payment activity, not the account name.

Personal “Friends & Family” transfers are generally treated as non-commercial and are less likely to be reported on a 1099-K.

Goods & Services payments (invoices, checkout links, online sales, client payments) are commercial and much more likely to be included in reporting.

So, even if you have a “personal” PayPal account, if you’re using it like a business account, you’re operating in business territory.

However, receiving a 1099-K does not automatically mean you owe taxes on the full amount shown because Form 1099-K reports gross payment volume, which includes:

• Refunds and chargebacks

• Payment processing fees

• Shipping you collected but later paid out

• Sales tax collected (in some cases)

• Pass-through amounts that aren’t truly “income”

So, it’s your responsibility to correctly report your real taxable income by tracking revenue (what you actually earned), expenses (what you spent to earn it), and net profit (what you keep).

🔖 Related Read: How to Create a US PayPal Account – International Founder Guide

What Types of PayPal Transactions Are Reported (and Which Aren’t)?

PayPal reporting is mainly tied to whether the payment appears to be business income (goods/services) or a personal transfer (friends/family). 

This is a key part of understanding PayPal’s income tax reporting and how PayPal’s personal vs. business taxes actually work.

PayPal Transactions That Are Typically Reported

These are the payments that most often trigger PayPal tax reporting because they’re connected to income-generating activity.

1. Payments for goods and services

If someone pays you through PayPal using the “Goods & Services” option (or pays through an invoice, checkout page, or payment link), PayPal treats it like a commercial transaction.

For example, if a client pays you for design work, or a buyer purchases a digital product/service and checks out on your website using PayPal, the transaction will be included in PayPal’s reporting totals.

2. E-commerce sales

If you sell online, especially through e-commerce platforms like Shopify, WooCommerce, or Etsy, and PayPal is part of your checkout, those transactions are generally considered business sales.

Examples:

• Selling products through a Shopify store

• Dropshipping orders paid via PayPal

• Print-on-demand product sales

Even if you’re running a “small side hustle,” PayPal still sees these as commercial payments.

3. Freelance or contractor payments

Freelancers, consultants, and service providers often receive client payments via PayPal, such as monthly retainer payments, one-time project fees, coaching sessions, or consulting calls.

So, if you’re getting paid for work you performed, it counts as business-related income and is much more likely to be tracked for reporting purposes.

PayPal Transactions That Are Not Typically Reported

Now let’s talk about the transactions that generally don’t fall under PayPal’s business reporting system.

1. Friends & family transfers

Personal transfers through PayPal’s “Friends & Family” option are usually not treated as commercial payments, like splitting dinner with a friend, paying back a roommate, or sending money to family members.

That said, if you’re receiving a high volume of “friends & family” payments that look like business income, it can still raise flags, so don’t use this as a workaround.

2. Reimbursements

If someone reimburses you for a shared expense, that money typically isn’t “income.” These can be a friend reimbursing you for concert tickets or a travel reimbursement for a work trip.

But there’s the catch. PayPal may still show it in your payment totals depending on how it was sent. That’s why keeping records matters.

3. Personal gifts

Birthday money from a relative, wedding gifts, or a friend sending you money as a thank-you are not considered business income.

Again, it depends on how it’s sent and whether it appears to be business activity. Documentation helps protect you.

4. Refunds (with nuance)

Refunds are tricky because they can show up in different ways depending on timing and how the processor reports totals.

For example, if you sell a product for $200 and later refund it, your true income is $0. But the gross amount may still appear in your reporting totals before adjustments.

This is why refunds don’t automatically “fix” your tax situation unless your bookkeeping reflects what actually happened.

What Information Does PayPal Share With the IRS?

When PayPal reports your activity to the IRS, it sends a high-level summary through Form 1099-K, and that’s where many freelancers and online sellers get confused.

Understanding these PayPal IRS reporting details is important because the IRS uses this information to match what PayPal reports against what you report on your tax return.

1. Gross payment amount (not your profit)

PayPal reports your gross payment volume, meaning the total amount of eligible payments processed through your account during the year.

That number can include customer payments, shipping charges, processing fees PayPal deducted, refunds you later issued, chargebacks, disputes, and sales tax collected.

So if your PayPal account shows $80,000 received, that doesn’t mean you earned $80,000 in profit, or even $80,000 in taxable income.

It simply means $80,000 flowed through PayPal in reportable transactions.

2. Your name, address, and Taxpayer Identification Number

To report accurately, PayPal also shares identifying information tied to your account, including our legal name (or business name), your address, and Taxpayer Identification Number (like an SSN, EIN, or ITIN, depending on your setup).

This is how the IRS connects the reported payment activity to the correct taxpayer. Make sure your PayPal profile info is up-to-date, complete, and matches your tax filing identity.

Or your business can run into problems, especially if you’re using PayPal across borders or switching from a personal to a business setup.

3. No expense, refund, or “context” is included

PayPal does not report context such as expenses, cost of goods sold (COGS), marketing spend, shipping costs, refund reasons, chargeback explanations, or net profit calculations.

The IRS gets the gross number, but it doesn’t automatically know what portion was eaten up by business costs.

That’s why two people can both receive a 1099-K showing $50,000, but one might have $45,000 in expenses (low profit), and the other might have $5,000 in expenses (high profit).

The IRS won’t know the difference unless your tax return and records clearly explain it. That’s why proper bookkeeping is critical. Once PayPal reports your gross payments, you need to:

• Separate revenue vs refunds

• Track fees and expenses

• Report net income correctly

• Avoid paying tax on money you didn’t actually keep

How Mismatches Can Trigger IRS Notices

The IRS uses automated systems to compare what PayPal reported on your 1099-K vs. what you reported on your tax return.

If the IRS sees PayPal reporting $60,000 but your return only reflects $10,000 (without explanation), that mismatch can trigger:

• A notice asking for clarification

• Requests for documentation

• In more serious cases, an audit trail

Most of the time, these issues happen because someone forgot to report PayPal income, reported only “net deposits” instead of gross income, didn’t track refunds/fees, or mixed personal and business payments in one account.

What Happens If You Don’t Report PayPal Income on Your Taxes?

PayPal doesn’t just “hold” your money. It can also report certain payment activity to the IRS through Form 1099-K. So if you leave that income out, the IRS may still know it exists.

The IRS matching system: 1099-K vs. your tax return

The IRS runs an automated matching system that compares what third parties report (like PayPal) against what you report on your tax return.

So if PayPal issues a 1099-K showing (for example) $40,000 in gross payments, and your tax return shows $0 business income (or doesn’t reflect that activity properly), the IRS may flag it.

This is what people mean when they talk about IRS PayPal income reporting. The IRS is looking for consistency between your PayPal 1099-K gross amount and your reported business income.

Even if you didn’t receive a 1099-K, you’re still required to report taxable income. But once a 1099-K exists, the IRS has an extra “paper trail” to compare against.

What can happen if you don’t report PayPal income?

Not reporting PayPal income doesn’t automatically mean you’ll get audited tomorrow. But it can trigger a chain of issues, especially if the numbers are significant.

Here are the most common ones:

1. IRS notice (the most common scenario)

This is usually the first step. Sometimes they’ll propose a higher tax bill based on the assumption that the 1099-K amount = taxable income, which is often not true (because it’s gross, not profit).

But if you don’t respond, the IRS can move forward with its proposed adjustment anyway.

2. Additional taxes owed (plus interest)

If the IRS believes you underreported income, they may calculate extra tax due and interest from the original due date.

Even if you eventually correct it, delays can make the total amount larger than it needed to be.

3. Penalties

Depending on the situation, penalties can apply for underpayment, late payment, or accuracy-related errors (if the IRS believes the return was incorrect).

In many cases, penalties happen because someone didn’t track PayPal properly and guessed numbers at filing time.

4. Audit risk (less common, but possible)

Not every mismatch leads to a full audit. But large gaps, repeated issues, or messy records can increase your audit risk.

The biggest red flag isn’t always the income itself. It’s when your return looks inconsistent, like:

• Big PayPal volume, but no business return filed

• High revenue reported, but no expenses documented

• Reporting random “net deposits” without support

Myth: “PayPal already taxed it”

PayPal does not calculate your income tax. PayPal does not pay taxes for you. It only issues a 1099-K that reports this amount of money moving through this account for goods/services.

It’s still on you to report the income in your tax return, deduct legitimate expenses, and pay the right amount of tax

Practical Steps to Fix Mistakes Proactively (Before the IRS Escalates It)

If you realize you didn’t report PayPal income correctly, don’t panic. Most issues are fixable, especially if you act early.

Here’s what to do:

1. Download your PayPal transaction history 

Go to PayPal and export your activity for the tax year:

• Gross payments received

• Fees

• Refunds

• Chargebacks

• Transfers to the bank

This gives you a clean starting point instead of guessing.

2. Separate “gross received” from “actual income”

A big mistake people make is treating PayPal deposits like profit. Instead, break it into categories:

• Sales/service revenue

• Refunds and reversals

• PayPal processing fees

• Shipping/transaction costs

• Other business expenses

3. Rebuild your books (even if it’s late)

If you don’t have bookkeeping, now is the time to clean it up. Good records protect you if the IRS asks questions later.

At a minimum, you want an income and expense summary with supporting documents for deductions (receipts, invoices, statements).

4. File an amended return if needed

If you already filed and the numbers are wrong, you may need to file an amended return to correct them. This often helps because it shows you’re being proactive and not hiding anything.

5. Don’t ignore IRS letters

If you have already received a notice, don’t delay. Even if you disagree with the IRS calculation, you can respond with:

• Your corrected numbers

• Supporting documentation

• A clear explanation of why the 1099-K amount is not equal to taxable income

🔖 Related Read: PayPal Business Account Verification Failed! What Now?

How to Stay Tax-Compliant If You Use PayPal for Business (Without Overthinking It)

PayPal tax compliance doesn’t require you to be a tax expert. You just need a simple system that helps you track what came in, what went out, and what you actually earned.

Below is an actionable checklist you can follow whether you’re a freelancer, Shopify seller, consultant, or running a small online business.

1. Separate personal and business PayPal accounts

This is the #1 habit that makes everything else easier. If you’re using one PayPal account for client payments, personal transfers, subscriptions, and business expenses, your records will become a mess fast. 

And when tax season comes, you’ll waste hours trying to figure out what was “business” and what wasn’t. Instead, use a single PayPal account exclusively for business transactions.

A dedicated business PayPal account gives you cleaner income reports, easier bookkeeping, and fewer mistakes when matching PayPal activity to your tax return.

2. Track gross vs. net income (PayPal shows gross—but you pay tax on net)

This is where most people mess up. For example, you invoice a client for $1,000, but PayPal charges fees (example) $35. So, you actually receive $965.

PayPal may report the $1,000 gross payment (not your profit). But you shouldn’t pay taxes as if you kept the full $1,000.

So, you need to track what the customer paid and what you kept after fees/refunds to calculate net income minus business expenses

This is a core part of PayPal tax compliance because when your tax return matches your real numbers, you avoid red flags.

3. Keep expense records (because PayPal won’t tell the IRS your costs)

PayPal doesn’t report your expenses to the IRS. It only reports payment volume (gross). That means it’s your job to document the costs that reduce your taxable income, like:

• PayPal processing fees

• Software subscriptions (Shopify apps, Canva, Adobe, etc.)

• Advertising spend (Meta, Google, TikTok)

• Shipping costs and packaging

• Contractor or freelancer payments

• Equipment (laptop, camera, tools if used for business)

• Home office expenses (if eligible)

4. File the correct tax forms (based on how your business is set up)

The tax forms you file depend on your business structure and where you operate. Here’s a simplified overview:

• Sole proprietor/single-member LLC (default): often reported on Schedule C

• Partnership / multi-member LLC: typically files Form 1065

• S-Corp: files Form 1120-S (and owners take payroll + distributions)

• C-Corp: files Form 1120

The key point to remember is that PayPal doesn’t replace tax filing. It’s just a payment processor.

So, even if PayPal reports activity on a 1099-K, you still need to file the correct return and report the income properly.

5. Understand sales tax vs. income tax (they’re not the same thing)

A lot of online sellers think that if they paid taxes on PayPal income, they’re covered. However, there are two totally different tax categories:

• Income tax: This is a tax on your profit (what you earn after expenses).

• Sales tax: This is a tax you may need to collect from customers and remit to the state, depending on where you have sales tax nexus.

If you sell a product for $100, your customer pays $100 + sales tax. That sales tax money is NOT your income since you’re holding it temporarily for the state.

This matters a lot to Shopify and e-commerce founders who use PayPal, because PayPal doesn’t automatically handle your sales tax compliance.

The Simplest Monthly PayPal Tax Compliance Routine

If you want a “do this once a month” checklist, here it is:

1. Download PayPal activity summary
2. Track gross payments + fees + refunds
3. Categorize business expenses
4. Reconcile PayPal activity to your bank deposits
5. Save receipts and invoices in one folder
6. Review your profit and set aside money for taxes

How doola Helps PayPal Users Stay Compliant

doola helps founders set up the right structure from Day 1 and build a solid financial foundation, so your PayPal income is easier to track and report, and less likely to trigger compliance headaches.

We handle LLC or C-Corp formation on your behalf, and your business finances stop looking like “random inflows” and start looking like real, organized business revenue.

This helps you properly separate personal vs. business activity, keep cleaner books (income, expenses, refunds, fees), and create a clear paper trail if you ever need to prove income.

We also ensure swift EIN (Employer Identification Number) approval so your PayPal activity aligns with your business identity.

If you’re outside the US but selling to US customers, we help you deal with extra layers of complexity by helping you:

🚀 Form a US LLC or C-Corp

🚀 Get your EIN and open a US business bank account

🚀 Build a compliant structure for receiving business income through PayPal

🚀 Stay on top of ongoing US filing responsibilities

We also understand that PayPal compliance isn’t just about receiving money. It’s about what happens after. We help you with:

• Bookkeeping support to track income vs expenses correctly

• Ongoing compliance reminders and filings

• Tax support so you’re not scrambling at year-end

• Guidance as your business grows (new states, higher volume, new obligations)

Ready to stay compliant and grow with confidence?

Start your US business the right way with doola!

FAQs

Does PayPal report personal payments to the IRS?

Usually, no. PayPal typically reports commercial payments (payments for goods and services), not casual personal transfers.

However, if personal payments start looking like business activity (high volume, frequent payments, inconsistent labels), it can still raise flags.

Will I get a 1099-K if I use PayPal Friends and Family?

In most cases, no. Payments sent through Friends and Family are not treated as goods/services transactions, so they’re typically not included in 1099-K reporting.

Do I need to report PayPal income even if I didn’t get a 1099-K?

Yes. This is one of the biggest misconceptions online. You must report all taxable business income, even if you didn’t receive a 1099-K.

1099-K is just an information report. Your tax obligation depends on whether the money is taxable income, not whether a form was issued.

Is PayPal income taxable for international sellers?

PayPal reporting is not the same as tax liability. Even if PayPal reports a payment to the IRS (like through a 1099-K), that doesn’t automatically mean you owe US tax on the full amount.

International sellers should pay special attention to:

• US income tax rules (effectively connected income, withholding, treaties)

• Sales tax obligations (which are different from income tax)

• Proper business setup + bookkeeping to prove real profit vs gross receipts

If you’re a non-U.S. founder using PayPal to sell into the U.S., having the right structure (LLC/C-Corp + EIN + clean books) makes compliance much easier.

How does PayPal reporting differ from Stripe or Square?

At a high level, PayPal, Stripe, and Square work similarly for IRS reporting. The main differences come down to:

• How you accept payments (PayPal checkout vs Stripe card processing vs Square POS)

• How payouts and fees show up in your records

• Dispute and refund handling

• Account risk controls (PayPal is often stricter with holds for cross-border sellers)

What should I do if my 1099-K amount is incorrect?

First: don’t ignore it. And don’t blindly report it as income either. Here’s what to do instead:

1. Compare the 1099-K to your real records

2. Identify the most common causes of mismatch

3. Contact PayPal if there’s a true error

4. Report correctly on your tax return (with support)

Do I need an LLC to receive PayPal payments legally?

No, you can legally receive PayPal payments as an individual. Freelancers and sole proprietors do it all the time. 

However, you may want one if you want liability protection, open a business bank account, and keep personal and business finances separate.

And if you’re a non-U.S. founder, forming a U.S. LLC or C-Corp can also help unlock smoother access to business banking and payment processing.