1099-k received from Paypal but almost transactions are personal

[drnag]

I am a casual Ebay seller but have a business Paypal account for the debit card. I just received a form 1099-K because the total number of transactions are >200 for the year. Out of these, only 3-4 are Ebay sales amounting to about $700, but the total amount on the 1099-K is about $1800 and includes cashback received from Rakuten or other cashback websites, or other small income (online surveys, etc, which would not be enough to otherwise trigger a 1099-MISC but happy to report it regardless).

My question is : How and where should I enter this information in Turbo and here and how do I justify this difference? Should I only be paying taxes on the profits on the eBay sales and deduct any eBay/ Shipping fees etc?

Happy to upgrade to TurboTax (currently Premier) if needed. Will I need to file by mail, or can the explanation be mailed separately?

[KathrynG3]

• The income should be reported on Schedule C, which will allow you to offset the income with the expenses.
  
  Since these sources of income and expenses are basically related to each other, they can all be reported on one Schedule C, instead of reported separately.
  
  But, when you enter the details into TurboTax, list any government form amounts in the same way you received them.
   
  • In other words, enter Form 1099-K from E-Bay by itself. On the next line, enter the Rakuten Form you received, etc. 
  • For the expenses, add up everything for each category that you have for the whole year that you paid across all the different types of income and enter. 
     
• Yes, it will require an upgrade in the program, but TurboTax will let you know as you are entering your details. Simply start in the income section under self-employment.
   
• Click here for more specifics on entering your details: Where do I enter my Schedule C? 
   
• Any difference between your records and the forms you've received must be explained or you would have to pay tax on the amounts as reported on the forms less provable expenses. Keep in mind, government forms such as Form 1099-K or Form 1099-MISC have already been submitted to the IRS at the same time they were sent to you.
   
• Yes, you should only be taxed on the net amount, the income earned less the expenses paid out.
   
• Yes, you will be able to e-file. Your situation does not require filing by mail. 

[drnag]

Thanks a lot,  @KathrynG3. Super helpful. Quick follow up questions:

• In other words, enter Form 1099-K from E-Bay by itself. On the next line, enter the Rakuten Form you received, etc. 
  • The other services (Rakuten, Rebatekey) do not issue any government forms, and others (such as online surveys) are below the 1099-MISC threshold of $600-can I just pay tax on them as 'business income' by not excluding them?
• Any difference between your records and the forms you've received must be explained or you would have to pay tax on the amounts as reported on the forms less provable expenses. Keep in mind, government forms such as Form 1099-K or Form 1099-MISC have already been submitted to the IRS at the same time they were sent to you.
  • How can I explain the difference at the time of filing, or do I file and wait for an audit?

[KathrynG3]

1. Yes, you can pay tax by reporting amounts as business income when no form was issued.

By reporting the "in and out" the IRS sees Form 1099-K as expected, as well as business expenses or separately stated reductions of the income received. The main thing is that the full amount as received is reported on the return. 

For the income without forms, enter a single income number and keep your supporting documentation for your records. Any related business expenses can be deducted.

2. The difference can be explained by what is reported on the tax return now. To report the items that reduced the income but were not actual expenses, you cannot report this as negative income in TurboTax when you are reporting self-employed income from Form 1099-K. If it is not self-employed income being reported to you on Schedule-K, then see this article: 1099-K from PayPal for an alternative approach. 

There are two options to report it. The tax effect is the same either way.

Option 1: Use the Rebates and refunds option under Less Common Income when reporting income.
 

Option 2: Include the income reduction with the expenses, and clarify it with the description.

To do Option 2 in TurboTax:

• Go to Self-employment income & expenses and Edit/Add
• At Your 2020 self-employed work summary, select Edit
• Scroll down to EXPENSES and click in the lower left hand corner, Add expenses for this work
• Scroll to Other miscellaneous expenses select the toggle, scroll to the bottom of the page and click Continue 
• Enter a Description in reference to the tax form if you wish, such as Form 1099-K Cash Back from Rakuten, the amount, and Continue

[Edited 01/27/2021 |8:48 AM PST]

@drnag 

[madismommy]

Do you know if on Paypal, when putting in expenses, are the paypal fees considered expenses? Or does paypal only count the actual money received as profit. for example, invoice is for 25.00 but I only received 23.97. Is the 25 counted or the 23.97 on the 1099. I am trying to figure out if I need to add paypal fees as expenses.

[Irene2805]

Yes - The PayPal fees are considered business expenses.  However, you'll have to check with PayPal whether the amount reported to you is gross or net of the PayPal fees.