PayPal 1099-K for sending money to my Wife

[viking]

PayPal will be reporting a 1099-K for a $600 threshold in 2022.
I frequently send money to my wife using a credit card and use PayPal QR-code (because of lower transaction fees).
This is NOT income.
PayPal has informed me that they will anyway need to send us a 1099-K for this in Jan 2023.

We file a joint tax return. How do we enter and deal with the 1099-K? We shouldn't have to pay taxes on our own money....

[Critter-3]

If you really mean the 2022 tax year filing in 2023 then the IRS has time to figure out a way for folks like you to report the transfer but not  pay taxes on it.  

I highly recommend you seek an alternate method to transfer the funds ... bank transfers from connected accounts, venmo, etc.  

[Opus 17]

Currently, there are a couple of different processes you can use to report a 1099K that is not taxable income. However, these processes are fairly clumsy. We are guessing that the IRS will have to come up with a new process for the 2022 tax year, but we don’t know what that will be.  We will all have to wait together.

[viking]

What are those crude methods? I hope that they will not lead to an Audit...

[Critter-3]

Let's not discuss the workarounds  until they are needed ...  if the IRS puts out a proper way to handle this issue they will be mute.

[viking]

It is financially beneficial for us to pay my wife through PayPal next year (starting January 2022). However, we need to make sure now that we will be able to explain this on our 2022 Federal (and State) return that these were just personal payment to my wife and it will not cause an audit and/or tax liability.

That is why I wonder about the work-around at this time.

[Critter-3]

I don't understand why "paying" your spouse thru paypal can possibly be financially beneficial ?   Moving money from your personal account to your wife's personal account has no benefits that I can think of ... it is like moving money from one pant pocket to another.   You should be moving personal money from the business account  to your personal account and then you can move it any way you want to your wife.  Never pay personal expenses out of a business account ... doing so will make an IRS financial audit miserable. 

Now does your spouse work for your business ?  

[VolvoGirl]

Can't you set up a new Joint bank account (checking or Savings) that you both have access to?  Then you can transfer money to it.  What's the rest of story?   What's the purpose?  This seems very awkward.

[viking]

There is no business involved.
I have a personal bank account that requires me to use my credit card with a minimum spend requirement in order to get the highest interest rate. Thus, I use it with my personal PayPal account to send money to my wife's personal PayPal account.

[Critter-3]

Well then you really should find another option next year due to the new regulations. 

Did you ever try using the credit card to pay for everyday expenses like utilities, mortgage, insurance, other CC payments, groceries, etc?   My sister uses her CC for absolutely everything she can just for the Disney Points she gets ... they go to disney 3 times a year just using points for a week's vacation. 

[Opus 17]

@viking 

is this a new arrangement or has it been working for you for a while? Many credit card promotions differentiate between cash transactions and credit transactions, and transactions that count as cash advances don’t accrue special benefits. Also, I’m sure that if your credit card company figures out what you’re doing, they can probably close your card for violating their terms of service.

Be that as it may, if you choose to conduct your personal business in such a convoluted fashion, you are going to have to be responsible for any tax consequences.  Transfers of funds between spouses are not taxable, but if you perform the transfers in a way that makes them appear taxable, you may have compliance issues with the IRS. Depending on the dollar amount of the transactions, you could also run afoul of something called “structuring.“ Structuring is when you structure a financial transaction in a misleading or illegal way to avoid reporting requirements even though the underlying transaction may be perfectly legal.

And in any case, we can’t tell you what the new IRS procedure to report nontaxable 1099-K forms will be until we find out if they are actually going to create such a procedure.

[viking]

It is not a regular one-time promotion. It is just a requirement to use the credit card, with a minimum spend requirement every month. I have done this for more than one year w/o any issues. I have also not found anything in the terms that would violate the Terms (it is a very small and special bank).

I find this hard to understand why this would be "structuring" as I am not trying to avoid any reporting. Is is the opposite, PayPal will report something that, I believe, should not be reported.

Per the new IRS regulation, I understand that personal transfers should not be reported by PayPal on a 1099-K, no matter the source of the funds, via credit card or bank account. This is true whether between spouses, friends or other (See (b)):

SEC. 9674. MODIFICATION OF EXCEPTIONS FOR REPORTING OF THIRD PARTY NETWORK TRANSACTIONS.

(a) In General.—Section 6050W(e) of the Internal Revenue Code of 1986 is amended to read as follows:

“(e) De Minimis Exception For Third Party Settlement Organizations.—A third party settlement organization shall not be required to report any information under subsection (a) with respect to third party network transactions of any participating payee if the amount which would otherwise be reported under subsection (a)(2) with respect to such transactions does not exceed $600.”.

(b) Clarification That Reporting Is Not Required On Transactions Which Are Not For Goods Or Services.—Section 6050W(c)(3) of such Code is amended by inserting “described in subsection (d)(3)(A)(iii)” after “any transaction”.

[Critter-3]

If this paypal account is tied to your(or her)  business account  then paypal must report all the transactions per the new regulations.  Note this only affects the "income" on an account not the expenditures.  So only the person receiving the payment will be affected.    They say personal transactions are not going to be reported however how they decide which is personal and which is not is not mentioned in their FAQs ... this would be a question for Paypal to answer ...   https://www.paypal.com/us/webapps/mpp/irs6050w 

Are personal payments that I receive counted in the total that will be reported to the IRS?

No. Personal payments that are not payments for the sale of goods or services will not be counted when determining if the IRS thresholds have been reached and will not be included on your Form 1099-K if you exceed the thresholds. However, all payments received for the sale of goods or services will be used to calculate the gross payment volume to be reported. PayPal monitors accounts to ensure that personal payments are not being used for sales of goods and services.

IRS current  info : 

https://www.irs.gov/payments/general-faqs-on-new-payment-card-reporting-requirements

I still contend there are other options available to you to "spend" the needed monthly amount by using the CC to pay for monthly  bills like utilities... see my other post.  

[viking]

The payments go to a personal, not a business account.
I am paying using a QR code because the fees are lower (1.9% vs 2.7%).
PayPal have verbally informed me that even though he understands that these are personally payments to my wife, the system has no way of knowing this and they will therefore need to report this on a 1099-K.

The situation is similar with personal payments through Google Pay (although they only accept debit cards). However, they have a way to cancel the 1099-K, if issued, by certifying that these were personal (P2P) payments.

I do not have other options of spending to meet the credit card requirement. This is the method that I have used for more than one year. Now, the regulations makes it complicated, even though it is not supposed to affect us.

[Critter-3]

Well to catch the folks who underreport their income  the wide net they are casting are going to affect the innocent.  Of course using the CC to move money from your pocket to hers just to meet some arbitrary amount for a better % rate doesn't seem kosher either ... I don't think that is what they had in mind when that offer was put in place.  We will just have to wait &  see what the regulations or methods the IRS will put in place to handle such personal situations since the info I posted from them says that personal transactions are exempt.