Confusing New Reporting Rules for Paypal & Merchant Service Providers

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Expect something new from your merchant service provider and Paypal this year. You’re going to get a form reporting sales you’ve made if you received over $20,000 and made over 200 transactions.

We’ve known about that for a few years, so that part might not be new to you. Here’s the part that sounds a little confusing.

If you don’t give a valid tax ID number (social security number or employer ID number), then Paypal must hold back a mandatory 28% backup withholding. But that’s true only if you have more than 200 transactions. Note that the requirement is different then the previous requirement which was $20,000 in sales PLUS 200 trasnsactions. The mandatory withholding is just if you have over 200 transactions.

And if you use a merchant service provider, it’s even more confusing. There IS not other requirement. A bad tax ID number means that there must start to be mandatory withholding.

Hopefully the providers will give you a warning first. I’d hate to see mandatory withholding when it’s just due to something being typed in wrong.

Either way, don’t ignore the requirement. The IRS is definitely going to be paying attention.

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