Do I owe taxes on Paypal Friends & Family transactions from international senders?

Wait, so if my friends from Canada send me money to help with rent, do I have to report that too? Or is that different since it's actually personal and not business?

Thanks for the response. So even though PayPal might not report it, I still need to include it as income. Would I be better off asking clients to use the regular payment option instead of F&F going forward? I'm worried about getting in trouble with either PayPal or the IRS. I've been keeping pretty good records of my design work and expenses like software subscriptions and a new computer I bought specifically for graphic design. Can I deduct all of those?

For the person asking about friends helping with rent - that's different. True gifts or personal assistance from friends doesn't count as taxable income. The key distinction is whether money is payment for goods/services (taxable) versus a genuine gift with no expectation of anything in return. As for the original poster, yes, you should definitely switch to proper business transactions. Not only does this keep you compliant with PayPal's terms of service, but it creates a cleaner record for tax purposes. And absolutely, you can deduct legitimate business expenses like design software, hardware primarily used for your business, and other ordinary and necessary business costs. Just keep good documentation of everything.

How does it actually work with identifying which transactions are business vs personal? My PayPal is a total mess with both types mixed together.

Did you still have to pay taxes on all of it? I'm in a similar boat with about $12k in international F&F payments and was hoping to avoid the tax hit since PayPal doesn't report it.

It looks at transaction patterns, descriptions, and recurring payments to help distinguish business from personal transfers. You can also manually categorize transactions where needed, and it learns from your corrections. For my photography business, it quickly identified which regular payments were from clients versus actual friends. Yes, I did pay taxes on all my business income, even the F&F transactions. While it was tempting to ignore since PayPal might not report it, that's still tax evasion. The peace of mind is worth it, plus the tool helped identify so many legitimate deductions that my tax bill was actually lower than I expected. Better to stay compliant than risk penalties or an audit down the road.

How does that even work? Sounds like a scam to me. You're telling me they somehow get priority access to IRS agents?

How much does it cost? The IRS phone situation is ridiculous - I tried calling 8 times last year and never got through.

It's not priority access - they use technology to navigate the phone system and wait on hold for you. Instead of you personally sitting there for hours listening to hold music, their system does it. When an agent finally picks up, that's when they call and connect you. It's just a more efficient way to deal with the hold times. I don't remember the exact cost but it was reasonable given the hours of hold time it saved me. Way less than what I'd bill for my own time sitting on hold. And the peace of mind from getting definitive answers about my international payment situation directly from the IRS was worth every penny.

I had no idea about the tax treaties! None of my clients have mentioned withholding taxes, but I'll definitely ask. And that's a great tip about separate PayPal accounts - do you know if I can open a business one without formally registering as a business entity? I'm just a sole proprietor right now.

You absolutely can open a PayPal business account as a sole proprietor. You'll need to provide your SSN and some basic info, but no formal business registration is required. It allows you to accept credit card payments and gives more professional invoicing options too. Regarding tax treaties, they vary by country. If your clients are in countries like Canada, UK, Australia, or most European nations, there are established tax treaties. However, in my experience, most individual clients aren't withholding taxes unless they're larger companies. Still worth checking if you work with bigger international firms.

I think the reporting requirements are different for international transactions. I've heard PayPal only issues 1099-Ks for domestic (US-based) transactions over the threshold. But like everyone's saying, you still need to report the income regardless.

This is really helpful advice about keeping detailed records! I'm new to freelancing and have been pretty sloppy with my bookkeeping. Can you share what specific details you include in your spreadsheets? I want to make sure I'm tracking everything I need in case of an audit. Also, I had no idea PayPal was cracking down on F&F misuse. That's another good reason to switch to proper business payments beyond just the tax compliance issues. Thanks for sharing your experience with crypto payments too - it's reassuring to know others are dealing with similar reporting challenges with non-traditional payment methods.

Great point about the detailed record keeping! For my spreadsheets, I track: Date, Client Name/Company, Project Description, Payment Amount, Payment Method (PayPal F&F, crypto, etc.), Invoice Number (if applicable), and any related expenses for that project. I also keep a separate column for notes - like if a client mentioned they're a business vs individual, or if there were any unusual circumstances. This has been invaluable when trying to remember context months later during tax prep. One more tip - I scan and save all related emails, contracts, and project files organized by client/date. Creates a complete audit trail showing these are legitimate business transactions, not personal gifts. The IRS loves documentation, so the more organized records you have, the better protected you'll be.

This is really solid advice! I'm also a newcomer to freelancing and was worried I might be overthinking the tax situation, but it sounds like being cautious is definitely the right approach. One question - when you mention reporting on Schedule C, do you need to have formally registered as a business to do that? I'm just doing freelance work on the side right now and wasn't sure if I needed any special business registration first. Also, for business expenses, are things like a percentage of home internet and electricity bills legitimate deductions if I work from home? Thanks for emphasizing the importance of switching to proper business payments. I was hesitating because I didn't want to ask clients to pay more in fees, but you're right that legitimate businesses should understand this requirement.