PayPal Taxes: A Guide for Sellers Paid Through PayPal

It's common for freelancers, online sellers, and small business owners to accept PayPal payments. Whether you run an ecommerce shop, offer creative services, or sell casually through marketplaces, PayPal provides a simple way to get paid. What many sellers don’t realize is that PayPal income may still be taxable. The Internal Revenue Service (IRS) treats earnings from goods and service payments the same way, regardless of where the money lands, which means proper reporting is essential for staying compliant and avoiding penalties.

Sellers and other professionals who accept PayPal payments should use this guide to PayPal taxes as they prepare for the 2026 tax season. 

Key Highlights

• Payments received through PayPal for goods or services are taxable income.

• PayPal issues IRS Form 1099-K only if you exceed both the $20,000 and 200 transaction thresholds.

• You must report income even if you do not receive a PayPal 1099-K.

• The 1099-K reflects gross payments, not profit, so expenses must be tracked and deducted separately.

• Personal transfers are not taxable, but misclassified payments may require correction.

• Clear bookkeeping is essential during tax season and minimizes the risk of IRS scrutiny.

• Professional guidance helps sellers avoid missed deductions and reporting mistakes.

Why PayPal Taxes Matter for Small Business Owners and Sellers

Millions of small business owners, freelancers, and independent sellers rely on PayPal to accept customer business payments. Since money sent through applications does not pass through a traditional employer or payroll system, it can create the misconception that it’s not subject to taxes. In reality, income is taxable when earned, no matter the platform used.

If your PayPal account brings in revenue from business activities, the IRS expects it to be reported. Failing to do so can lead to penalties, interest, or additional scrutiny. For entrepreneurs and freelancers, accurate reporting is also a smart long-term strategy. Clean records help you:

• Understand profitability

• Manage cash flow

• Make better decisions throughout the tax year

As thresholds and tax laws evolve, staying informed helps protect your business from costly errors. A strong bookkeeping foundation, supported by tools such as this small business tax checklist and year-round professional accounting guidance, helps ensure proper documentation and timely filing.

What Is Form 1099-K and When Does PayPal Send It?

What Is Form 1099-K?

Form 1099-K is an informational tax form used to report payments received through third-party payment networks. The IRS receives a copy and compares that information with your income tax return, so it’s important that what you report aligns with what appears on the form.

A key point many sellers overlook is that a 1099-K lists gross payments, not net income. Several business expenses aren't listed on the form, including: 

• PayPal fees

• Cost of goods sold

• Shipping and returns

You’ll account for those costs separately when determining your actual taxable profit for the year.

When PayPal Must Issue a 1099-K (2025 Rules)

Beginning in 2025, PayPal must issue a 1099-K only if both of the following apply:

• You received more than $20,000 in payments for goods or services, and

• You had over 200 transactions during the calendar year.

Threshold changes coupled with temporary proposals to lower them more recently have caused confusion.

Even if PayPal does not send you a 1099-K, the IRS still requires you to report your income. The form itself does not determine whether the money is taxable. It simply provides the IRS with information that supports your filing.

What Is and Isn’t Reported on a 1099-K

A 1099-K includes:

• Gross payments received for sales of goods or services

• The total dollar amount processed for the year, before any fees or refunds

A 1099-K does not include:

• Personal transfers, such as gifts or shared expenses

• Payments categorized as friends and family

• Nonbusiness transactions

If PayPal misclassifies a personal payment as business income, or if business-related payments were incorrectly labeled as personal, you may need to request a corrected form.

How to Report PayPal Income on Your Taxes

Do you pay taxes on PayPal income? Use this PayPal seller tax guide to understand your obligations related to reporting PayPal income to IRS.

Recording Gross Income and Business Expenses

Your 1099-K, if issued, is only the starting point for reporting income. You will also need to track:

• PayPal fees

• Costs of goods sold

• Packaging and shipping

• Software costs

• Advertising and marketplace fees

• Refunds or chargebacks

Your taxable income is your profit, not your gross receipts. Proper bookkeeping allows you to subtract legitimate business expenses from the amount shown on the 1099-K.

Organizing receipts, invoices, PayPal statements, financial reports, and other tax documents throughout the year makes this process far smoother.

Filing as a Sole Proprietor, Freelancer, or Small Business Owner

Most independent sellers who get paid through PayPal operate as sole proprietors. Business income and expenses are typically reported on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship).

The 15.3% self-employment tax may also apply, which covers Social Security and Medicare contributions for self-employed individuals. You can estimate this using our free self-employment tax calculator.

What If You Don’t Receive a 1099-K?

You still need to report all income from goods or services, regardless of whether PayPal issued a form. The IRS states that sellers must report income even if a 1099-K is not generated, which is an informational return. 

Common Scenarios Sellers Should Watch Out For

Selling Personal Items at a Profit

Selling personal items at a loss is usually not taxable. However, if you sell a personal item for more than you originally paid for it, the profit may be treated as taxable income.

Even casual sellers may need to report their gains to the IRS at tax time. 

Mixing Personal and Business Transactions

Using one PayPal account for both business and personal payments can lead to misclassification. Avoid confusion by:

• Keeping separate accounts

• Labeling transactions consistently

• Reviewing categories throughout the year

Clear separation helps avoid errors and simplifies bookkeeping.

Receiving Payments in Crypto or Other Non-Fiat Formats

If you receive payments through PayPal's crypto features, tax rules may differ. Cryptocurrency can trigger capital gains or losses and may require separate reporting. This is an area where speaking with a tax professional for guidance can be especially helpful.

Recordkeeping Best Practices and How to Prepare for Tax Time

Good recordkeeping practices support accurate tax reporting and reduce the risk of errors. Adopt the following best practices to help you prepare for tax day. 

• Maintain detailed logs of all PayPal transactions

• Save receipts and invoices for deductible expenses

• Track shipping and packaging costs

• Reconcile PayPal activity with bookkeeping software

• Separate personal and business accounts

• Document any requests for corrected 1099-K forms

When It Makes Sense to Engage a Professional (and How 1-800Accountant Can Help)

If your PayPal income involves many transactions, mixed income types, refunds, or inventory, working with a professional can save time and reduce mistakes. An accountant can help you:

• Maximize deductible business expenses, including virtual accounting fees

• Ensure proper categorization of income

• Avoid inaccurate reporting on Schedule C

• Prepare for potential IRS inquiries

• Plan ahead for quarterly tax payments

1-800Accountant, America's leading virtual accounting firm, offers affordable, tax-deductible bookkeeping and tax services designed specifically for small business owners and freelancers. Gain peace of mind and a minimal tax liability from a dedicated accountant who understands your business and helps manage everything from year-round bookkeeping to tax preparation and filing.

Frequently Asked Questions

Do I owe tax if I only sell a few items a year through PayPal?

If you make a profit on an item or are running even a small business activity, the income may be taxable.

Does PayPal automatically withhold taxes?

No. You are responsible for reporting and paying any tax due.

What if I receive a 1099-K but still have a net loss?

If you receive a 1099-K but still have a net loss, you can deduct your business expenses. The form reports gross receipts only.

Does selling used personal items count as taxable income?

It's not taxable income if sold at a loss. Profit may be taxable.

Should I use a separate PayPal account for business and personal use?

Yes, separating personal and business accounts is a best practice. It prevents misclassification and simplifies your records.